Why Fed move is an early PSEi Christmas gift

Feelings of an early Christmas during my favorite “BER” months have now been buttressed by the US FED’s decision to withhold tapering off, contrary to what the markets had expected, and somewhat contrary to earlier signals that the FED itself actually telegraphed to the markets.

What?

Ok relax, nothing unusual here. It all seems to be within character as I shall later explain why FED ambiguity is more like the norm and historically documented.

For now, good news is good news. So we might as well just enjoy the ride while it lasts, notwithstanding if we even have a clue why we should be enjoying, much less – what ride?

Okay, this ride is our Elliot Wave 5, which I thoroughly discussed in an August 26 Rappler article.

As I convincingly discussed back then, this Wave 5 is our last and final bull ride since our lovely PSEi took off in 2009, propelled by no one else but by our soon retiring Santa Claus Uncle Ben Bernake.

Take this chart below, which amply illustrates who has been behind our booming global markets.

From the chart above, it is clear how the Quantitative Easing (QE) program actually helped propel the S&P500 into new highs by 2013, and together with that most emerging markets (EMs).

However, it was also that FED speak of tapering off this “stimulating” QE program that has led to a 26% collapse in the PSEi from our May 2013 high of 7,399.

It has been painful as it has been memorable. Take for instance the fact that its already September and most stock noobs who joined what earlier seemed to be a never ending bull ride without a pause button, woke up to a sluggish, directionless PSEi since – June, July, August and most of this September.

In any case, if my charts don’t forsake me, we should see a strong run up until December 2013 or even up to early 2014.

Partly because Wave 5 is known in Elliot Wave Theory (EWT) as the briskest bull wave. But also because we now have the gradual phasing out of that humongous P1.4 trillion in Special Deposit Accounts (SDA).

This newly freed up liquidity should then find itself gradually seeping into the PSEi, buying out ADHD foreign fund managers who have little faith in EMs.

Thus, based on my Einstein-like equation for this Wave 5, which I happen to have calculated just for Rappler’s audience, it goes something like this:

Wave5 PSEi Height = 1.4T in SDA x 3 Happy BER months remaining + 5,600 PSEi’s bottom

What a brilliant equation, isn’t it?

Seriously, I see a PSEi W5 target of about 9,000 +/- as BER months are unusually strong, and the peso and domestic liquidity should be strong drivers as well.

Actually whether we hit 9,000 or higher is less important for me. The best way to trade this is to watch out for that critical 7,400 PSEi level which is my frightening “double top” scenario. While history only sometimes repeats itself, the PSEi’s historical big tops were in 1989, 1997 and 2008. All those tops were Elliot Wave 3-4-5 sequenced double tops.

So if PSEi trades upward but seem to encounter resistance at 7,400, I would strongly suggest cut loss at 7,000 on the way down. If it stays above 7,000 after hitting 7,400 then by all means stay “sitted” in that PSEi bus as it goes higher.

Furthermore, as this Wave5 unfolds, the sectors who typically do well are the higher beta sectors, the greed stocks, like property, gaming, holding companies, banks and even mining stocks.

Fedspeak

But going back to what actually happened, let me digress a bit. Perhaps FED Chairmen are actually remembered more for their doublespeak than for their forward guidance.

Take this famous quote from former FED Chairman Alan Greenspan:

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

What? Okay, if that seems pretty clear to you after about 2 minutes scratching your head, consider this other quote from him, which even tops it all.

“I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”

Now, while Fed Chairman Bernanke isn’t guilty of the same doublespeak, he still gave the wrong signals to the market only to realize that there were more variables upsetting him other than that jobless rate.

Pundits are all trying to comprehend the reasons why even a modicum of tapering didn’t happen, but the likely suspects are as follows: 

• growth momentum in the US hasn’t been as strong as expected and has even led to the FED revising growth targets downward
• the jobless rate while below 7.3% is still indicative of weakness
• there are still deflationary pressures in the global economy
• the US housing market, while recovering, isn’t on sure footing yet

My own theory which is that most of the above were already obvious even when Uncle Ben started tapering talk last May.

But what wasn’t too clear at that time was the amount of upheaval tapering caused in the EMs (which many still consider just the “tail” vs. the “dog” or the developed economies).

Now this may seem farfetched but EMs now drive more than 50% of global growth. Can Uncle Ben really allow EMs to fold up, growth wise or create havoc & panic in global debt markets?

Perhaps the FED — and this is my own personal view — may also considered how global markets, especially EMs were affected. A major collapse in the EMs or “tail” will eventually affect the dog sooner or later. – Rappler.com

The author is Managing Director for Corporate Finance for the Center for Global Best Practices (CGBP). He was connected with PNB Capital & Investment Corp. as President & CEO and with Punongbayan & Arraulo, where he set up the first P&A/Ernst & Young Corporate Finance practice in the Philippines in 2001. Tony is active on Twitter for stock market newbies: @Tony88981.