IN looking at the stock market, think of time as…time, and price as movement through space.
We incorrectly tend to think of these as separate and distinct from each other. All those time-travel movies we have seen show some guy getting into his time machine and moving through “time” without moving through “space”. The Earth travels 1.6 million miles per day as it goes in its orbit around the Sun. Therefore, if you were sitting in your chair and went back in time to yesterday, your chair would actually be 1.6 million miles down the road, unless you could control space in addition to time.
The truth is that only a fool thinks that forecasting is simply price. Time is far more important than price.
On August 24 and 25, the Philippine Stock Exchange Composite Index (PSEi)—the price—fell 9.27 percent from the close on August 20th to the daily low on August 25th. Then from the weekly low of 6,603, the PSEi went up to close the week at 7,098 for a weekly high-to-close gain of 7.5 percent.
Neither the initial drop nor the following recovery in price made any sense in terms of time. The PSEi had already been in a downtrend since the high in April. The investors that went into panic mode selling out on the two “crashes” were wrong, and so were those that bought into the 7.5-percent “recovery”. In fact, that single weekly price move was a distortion of time. Since then, the PSEi has gone sideways, even if in a fairly large trading range between about 6,800 and 7,200.
Had that 9.27 percent move down and subsequent 7.5-percent recovery taken place in a month or two, we would have looked at the time frame, and concluded that the market was going sideways after coming from a basic downtrend.
During the period from the week of August 24th, we have seen weekly changes of up 3.2 percent, down 3 percent, up 4.2 percent and down 3 percent. Currently, the PSEi is down about 3 percent from the August 24 weekly close. That is about the same margin of error for your favorite presidential candidate in the opinion polls.
Time, not price, is dominant. Certainly, a rapid change in the price of a stock can signal a trend change. However, only time will tell if that price move did signal a price-trend change, and that is the point.
As I have said before, there were several of us predicting that the PSEi would go to 8,000, when the index was between 4,000 and 5,000. That was in late 2010, and I predicted 8,000 would be reached within 10 years. Others, more perceptive at this forecasting thing than I am, predicted an eventual move to 10,000, and I believe that they are correct.
The problem is, in my judgment, the 8,000 level was reached too soon. The price got out of synch with time, just as happened in August. The time and price “continuum” or gradual transition, if you will, has been distorted. If you look at a long-term monthly chart of the PSEi, you will see that from November 2012 to April 2013, the PSEi—the price—went up too fast, which caused a pullback decline to get price and time back to moving together.
Look at that same PSEi chart, and you see the same rapid movement happened between January 1, 2015, and April 2015, when the PSEi hit 8,000 high. Since then, we have experienced the same type of retracement as seen in 2013. And this is most interesting: The pullback in 2013 started at 7,000, which is basically the level to which we have fallen since reaching 8,000.
The average monthly PSEi change since the April 2009 breakout until the index started going up too quickly in November 2012 was 2 percent. Had the market continued that average 2-percent monthly increase from November 2012, we would now be at PSEi 10,800.
Instead, we have seen monthly movements, like up 8 percent down 9 percent, up 7 percent and down 6 percent. In September 2010 the PSEi rose 15 percent, which was too far too fast, and was followed by nearly a year of volatile but basically sideways action. That is what we experienced within even more volatile price movements in 2013, and what we have seen on a weekly basis these past few months.
Stock prices, similar to objects in space, can go up, down or sideways. Time has only one dimension—straight ahead. If prices move too far ahead of time, we have corrections in a trend until the trend changes. The PSE trend is still up.
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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.