Dead cat bounce
DEN SOMERA
A friend who is closely following the market suggested that its latest efforts to bounce back was but a “dead cat bounce.”
Also, if he were a player in the virtual stock trading challenge (being not lucky enough to be chosen among those to play in the present game), he’ll be selling all of his stock positions like he is actually doing. He feels the market is yet to find a bottom.
When the market fell into bear country last January 25, he already sent the cryptic note that the seesaw of movements that may follow will just be a “dead cat bounce.”
A dead cat bounce is a price movement that occurs during a bearish period. To one reference, a dead cat bounce “is a long-awaited correction of a brutal bearish trend.”
This happens when “after the market is down for six weeks in a row” (according to some experts’ reckonings).
“Bears (or investors who are more prone to selling than buying) start to lock in profits and value investors start to also believe the bottom has been reached.” Their concerted action to buy at the same time sends the market up.
“Momentum investors who are constantly on the lookout for oversold readings through their indicators,” like Pixiu in our virtual stock trading challenge, also contribute to the “awakening of buying pressure, if only for a brief time.”
Come to think of it, the market has been going down since it peaked in January of this year. Even without smoothing the trading results, the pattern has been clearly on the downtrend.
With the many troubling external factors, like the escalating trade war between the United States and China (which my friend also feel will surely drag us down), he just can’t imagine how our market could recover so easily, not to mention the existence of equally pressing political and economic internal issues now also causing some volatility in the market.
The recently concluded initial public offering (IPO) of construction firm DM Wenceslao and Associates Incorporated (DMW) is also expected to create additional pressure on the market’s present liquidity.
DMW is the first company to debut at the Philippine Stock Market (PSE) this year. Its offer price was set at P12 per share and raised a total of P8.15 billion from the sale of 679.17 million common shares.
DMW owns one of the largest land holdings in Metro Manila. Majority of these are located in Aseana City, of which it has a total leasable area of 59,000 square meters. It has earmarked P3.7 billion from the proceeds of the IPO to fund the construction of nine other real estate projects and improve the company’s average income growth record of 11 percent. It reported a net income of P1.6 billion in 2015 and doubled this in 2017. Through the IPO, the company is bullish it can attain its goal to expand fourfold within five years.
The final offer price of DMW was 48 percent lower from its much talked about initial pricing of P22.90 per share. On its listing date on June 29, Friday, DMW closed at P10.26 per share, down 14.5 percent from its IPO price.
As of July 4, Wednesday this week, DMW closed slightly lower again at P10.20, down another P0.08 centavos in relatively small volume.
Week 18 (July 2 – 4, 2018) initial trading activities
Still the most active in the virtual stock trading challenge up to this point of Week 18, Pixiu disposed her shareholdings in Philippine H2O Ventures Corp. (H2O), Manila Electric Company (MER) and The Philodrill Corporation.
For Pixiu, the news report in the acquisition of H2O by rising taipan Dennis A. Uy and the change of its corporate purpose as implied in its new name, PH Resorts Group Holdings, Inc. served as a “sell on good news” trading event.
However, as you will see in the table below, it took her until Wednesday to successfully sell her stockholdings in H2O. This happened only after lowering her selling prices and profit objectives.
Luck was also on her side. When she posted a much lower selling price of P6.50 per share on Wednesday, H2O opened at P7.10 a piece that she made more profit than she was ready to settle with.
With MER, her indicators were prodding her to already sell it. Its price was moving sideways and she can just come back for it when its upward trend resumes. She also had to absorb a loss to get rid of OV quickly. It has lost luster when the price of crude in the world market leveled down with the move by Saudi Arabia to help ease the price situation.
(See Table 1)
Play Hard was the next player who had a trading activity within the period. He had five trading orders first thing Monday morning.
One was a “buy” order for H2O, which was undone because his posted price was just too low of the stock’s done prices for the day. The next were four selling orders for EEI Corporation (EEI), SM Prime Holdings, Inc. (SMPH), Eagle Cement Corporation (EAGLE), and Ayala Land, Inc. (ALI).
Play Hard was quite explicit with his intentions for selling. He seemed to agree with my friend’s impression about the state of the market. Any attempt by it to bounce back may just turn out to be at best a “dead cat bounce.”
(See Table 2)
Bottom line
Last Friday, the market started to bounce back. It closed with a daily gain of 127.11 points or 1.80 percent on a value turnover of P7.13 billion, which was just about the market’s average for the year.
On Monday to Wednesday this week, things got even better. The market was especially buoyant on a much smaller value turnover. It was up 34.28 points or 0.47 percent on a value turnover of P4.8 billion only on Monday.
This was followed by another advance of 39.36 points or 0.54 percent on Tuesday, also powered by a small value turnover of P4.78 billion. It climbed higher and faster on Wednesday and ended with a day’s gain of 81.08 points or 1.11 percent on a small value turnover again of only P4.94 billion.
Such buoyancy, however, is not a foolproof indication that the market is back. The market’s daily gains since Friday last week still have to be reconfirmed – up to six weeks, if we are to believe the conclusions of one study on a dead cat bounce.
This is possibly the reason why my friend still thinks the efforts of the market to bounce back since Friday last week up to last Wednesday were just but a “dead cat bounce.”
As we noted in the study, after a long decline, the market can either make a short-lived bounce or enter a new phase in which the general direction of the market undergoes a sustained reversal – until it finds a bottom.
There is no simple way to knowing for sure a market’s direction. However, a technical know-how on spotting market reversals and bottoms should be helpful in finding the right answer – if the market is just on a dead cat bounce or has reached bottom.
A dead cat bounce can be a great money-making opportunity for swing traders. But this style of trading takes a great deal of dedication, skill in reacting to short-term movements and risk tolerance. It’s not good for the long-term or buy-and-hold investor, whose key to success is to have a diversified investment portfolio and think long term.
(Den Somera is a licensed stockbroker. The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. E-mail address of the writer is den.somera@manilatimes.net
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