11th Day High

The PSEi recorded a rare 11-day winning streak. In total, the market rallied by more than 10% adding 268 points in two weeks, breaching the initial resistance level of 2,725.0. The move indicates that we are clearly in a bull market. So should we start to worry about excessive exuberance? I guess not at this stage. Here are my arguments:

Solid technical grounds
The 11-day rally provides a good “technical” foundation for further run-ups. Eleven days will surely make a definitive trend! I am no chartist, but I do observe closely the price movements. As it is, we saw an orderly movement in share prices. Index heavyweights such as PLDT, ALI, AC and SMPH rose steadily in the past week without any wild “surges”. Shares prices rose by 1 to 2 fluctuations each trading day thus giving buyers and sellers enough time to digest their orders.

Contrast this to the run-up that we saw last summer, when share prices rose sharply in 3 days. Clearly, the rally cannot be sustained. So, we are definitely in a much better footing this time around.

Value over price
While share prices have risen, there is still value in the market. So how did this happen? The Price Earnings Ratio (PER) of the market is driven by 3 factors: earnings, earnings growth and discount rate. So even if the market has risen by 30% in 2006, there is still room for PER to expand since earnings on the average are above consensus expectations while discount rate continue to come down driven by the recent upgrade by Moody’s. So my estimate is for overall market PER to expand from 14x – 16x. This should bring the PSEi to 2,900 by yearend or 1Q07.

(I will discuss (in another article) how Moody’s ratings outlook affect discount rates and therefore market valuation. Beyond, the sentiment play, these factors are important for foreign fund managers in deciding where to allocate their money.)

So what to expect in the coming weeks?

We should see some correction in the market as investors take profits from the recent rally. Market leaders like PLDT, ALI, SMPH and AC will likely take a breather while rotational buying is expected on other “cheaper” blue-chip counters. Please check http://bigbigtrade.blogspot.com/2006/10/blue-cheap.html I expect continued buying of Petron (PCOR – P4.30) and Manila Water (MWC – P9.40), which does not merit any valuation disparity at this point.

Also, local money will likely come in. The move of Philippine Realty (RLT – P0.55) and Kuok Properties (KPP – P0.42) today signifies that “tsupiteros” will not be left out of the market. As mentioned, this is a “value-creating” market. So, the market will unearth every inch of “unrealized” value that can be found.