The Risks and Weaknesses of Technical Analysis
The PSEi basically formed a V-shaped pattern in the first quarter of 2010 which we took advantage late January to late February. The PSEi was buoyed by cash dividends in March, and we took a cautious stance during this month because of an interesting and unfavorable trend we observed in day-to-day trading. The PSEi has been generally down in daily trading from mid-March onwards. However, instead of naturally closing below its open to achieve a healthy correction for the day, buying spikes up before closing on a day-to-day basis. This caused white candles or bullish signals when analyzed at the end of each day.
This observation is critical because in technical analysis, there is a potential bullish inverted right shoulder from December 3, 2009 onwards. (Please refer to the yellow circle in the chart below. The blue lines show the inverted head and shoulder formation) When the head formation closed on March 11, 2010, the right shoulder was on its way to form after the deep correction the following day. That is when we noticed the daily spike-ups. The PSEi eventually proceeded to break the 3,130 resistance level rising to fulfill the target of the inverted head and shoulders.
The risk here is that the daily spike-ups prevented a healthy correction and a significant right shoulder formation. Major indicators such as Relative Strength Index were not also able to retreat to oversold levels to prepare for a long upward trend. This makes the PSEi’s rise to fulfill the target of the inverted head and shoulders formation unsustainable. We can only hypothesize the explanation for this.
Investors just couldn’t wait for a healthy correction upon noticing the huge gain from the inverted head and shoulders so they bought into the market early. The knowledge of what will happen in that formation and the advanced action made defeats the purpose of what that knowledge says. In other words, technical analysis is a very risky tool for stock picking. The herd, also with the knowledge of technical analysis, will follow those who manufactured the right shoulder with the spike-ups and will get burned when the PSEi cannot meet the bullish formation’s target.
Pymwymi Fund Performance
The Pymwymi fund is a basket of 15 stocks Corpecon Research has assessed as having high growth, the most resiliency to negative economic factors and high free float. They have been screened and selected using our investment methodology as detailed in the Philippine Stocks Guide 2010. The Pymwymi Fund is up 11.7%, while the PSEi is up 5.2% from the start of 2010. The variance between the Pymwymi Fund and the PSEi is at its biggest at 6.5% on March 31, 2010 in the first quarter of 2010.
The purpose of the Pymwymi Fund is not to beat the PSEi but to offer an alternative basket of stocks to invest in. It is also not prone to market factors which will cause the Fund’s gains to fluctuate daily. However, in the long run, we expect the Fund to produce excellent gains for the investor.
The New Philippine Stock Market Commentary Format
With our mission to pursue value and minimize risk in Philippine equities, we are ceasing technical analysis in our Philippine Stock Market Commentaries. In its place, we are substituting value-investing as promoted by the Pymwymi Fund. We have assessed Philippine stocks beyond our 40-stock coverage in search of other stocks with significant value and solid fundamentals. There are at least five possible candidates to include in the Pymwymi Fund.
The First Quarter 2010 Philippine Stock Market Report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.