IF you want to improve your understanding of how stock prices move, perhaps attending next year’s Philippine International Hot Air Balloon Festival at the Omni Aviation Complex in Clark Freeport Zone in Pampanga province might help.
Considering the cost ranges from $10,000 to $100,000, this event may prove that “The only difference between men and boys is the price of their toys.”
We all played with balloons when we were children, filling it with our own breath and then tossing it in the air and then waiting for it to come down. Sometimes a gust of wind may have caught the toy balloon sending it even higher. But we knew that eventually gravity would pull it earthward. Filling the balloon with helium would allow the toy to defy the force of gravity allowing it to climb far out of sight.
As we got older we learned that the balloon’s rise was not infinite but that eventually the lower atmospheric pressure at higher altitudes will stop the balloon from going up farther.
A young child looking at the hot- air balloons at the Clark festival might be confused based on his or her own experience with toy balloons. The child understands that the hot-air balloons are carrying a heavy weight and yet they go up. Further, the balloons not only go up, but they can come down and then go skyward again. Consequently, there must be some sort of “engine” that makes the balloon rise and fall.
The hot-air balloon rises as the burner is ignited and hot air causes the balloon to rise. At some point the burner is turned off as the air in the envelope is still at a high enough temperature to make it lighter than the surrounding air outside the envelope. However, as heat is dissipated from the air in the envelope, the balloon will begin to lose altitude. Unless the burner is reignited, the balloon will come back to earth.
The hot-air balloon pilot understands exactly what makes the balloon go up. Burning fuel creates heat that accumulates in the envelope, in effect, pushing against the outside colder air. If the fuel is turned off, the heat dissipates or is distributed out of the envelope, and the ever present outside cold air ‘pushes’ the balloon lower.
Stock prices move in the same way.
Like the outside colder air around the balloon, there are always sellers in the stock market. You may have noticed that for issues that are lightly traded, there may be only a few buyers bidding for a small number of shares. But there are always sellers wanting to get out at a particular price or simply to liquidate for cash.
Prices, like the balloon, will naturally descend over time unless there is the ‘fuel’ of buying. If buyers walk away, prices will eventually go lower.
The balloon envelope caries from accumulating heat to the distribution of heat and that is true for the stock market. Either, buyers are accumulating or sellers are distributing shares. When a price stops going up, or likewise, stops going down, that is the transition from accumulation to distribution.
The Philippine stock market had an unprecedented nine consecutive weeks of gains. But during the final week, there was clear distribution as volume remained constant but prices were only slightly higher. If the balloon’s burner is turned on, but we are not gaining altitude, then the heat the fuel is generating is not being accumulated but is being distributed outside of the envelope.
That is what happened about two weeks ago. This past week, buyers were not ‘fueling’ the market, and the normal ‘cold air’ sellers brought prices down. At some point, buyers will turn the burners back on, stocks will go under accumulation, and prices will rise. Understand this concept and watching for the transition points helps an investor indentify price tops and bottoms.
On a personal note, in this past Thursday’s column it should have read; “The budget deficit as a percentage of GDP has gone from minus 5.30 to minus 1.4 percent. The debt to GDP has fallen from a record high of 71 percent of GDP in 2002 to the current 49 percent.” I transposed the data numbers. Maybe I have been taking too much cold medicine.
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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.
1 comment
Awesome analysis.