Less than a month ago I wrote that “The only question that matters is; are you ready for a 15-percent move in either direction?” Over this past weekend at Money Summit 2016, I was asked: “Has the seven-year Philippine Stock Exchange [PSE] ‘bull market’ come to an end?”
The first question is critical; the second is not important.
The old saying that “Success has many fathers, failure is an orphan” applies particularly well to the stock market. Everyone is a stock-market genius when prices are going higher; not so much if the market is going down.
A 15-percent downside move from early April would take the PSE composite index (PSEi) to the 6,000 to 6,200 window. We could even see another 10-percent fall from that point. While by the conventional definition that would put the PSE deep into a “bear market”, that really does not mean anything in the big picture.
From the high in October 2007 to the low in January 2009, the PSEi declined over 50 percent. It was not the end of civilization as we know it and neither would a fall to PSEi mid-5,000 now be the end of the world. The key is being able to answer the first question.
Most of the current investors and stock-market commentators have never experienced a market we had as in 2007, 2000, or in 1997. Therefore, they do not have a clue how anyone could possibly prepare for a 15-percent rise, let alone a 50-percent market decline.
The first mistake is not getting out. The wisdom today is to continue buying as prices go down—the famous “peso-cost averaging”. That strategy is fine if your investment horizon is years in the future and you will never have a need for the money you have in the stock market until the price goes up.
The second mistake is not recognizing when the downtrend has changed to the upside. I started my PSE Strategy Guide service in October 2008 because I realized that prices had stopped going down. Ayala Corp. and SM Corp. were both trading at P150 then.
Five months later the seven-year bull market began. Regardless of at what level or when the PSEi stops going down, it will go back up even if the financial apocalypse is around the corner like some people would think.
Note that this is not a replay of 2008. Contrary to the opinion of one of my most respected stock-market analyst friends, this is not 1997-1998. However, the strategy is the same as before. Unless the PSEi turns higher quickly, it will move to 6,500. Then start buying small amounts of those issues that are holding relatively firm.
If they break support, take your small loss and wait. But if the market begins climbing, buy more on the way up. If the PSEi 6,500 breaks, wait for the 6,000 area and do it again.
They say you cannot pick the bottom. Maybe, but you can easily know when a price bottom has been reached; prices start going up from that point.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.