Stock Market Weekly: Recovering from oversold conditions

WHAT HAPPENED LAST WEEK

Last week, the PSEi traded in the red throughout the shortened trading week, resulting in a 3.53% w/w decline to close at 6,158.48, a decrease of 225.22 points. The market was negatively impacted by several factors: (i) escalating geopolitical tension, sparked by an altercation between Chinese and Filipino coast guards at Ayungin Shoal. This incident led to injuries among several Filipino personnel; (ii) the weakening of the peso, which is currently at its lowest level for the year against the USD; and finally, (iii) the rebalancing of the FTSE index, which resulted in foreign outflows totaling PHP 1.34 billion.

WHAT TO EXPECT THIS WEEK

This week, we expect the market to trade higher, recovering from oversold conditions after last Friday’s substantial drop. Investors will turn their attention to the Bangko Sentral ng Pilipinas (BSP) and the Federal Reserve (Fed) for guidance on the direction of monetary policy. On one side, the BSP is widely predicted to maintain policy rates at 6.5%. On the other, several Federal Reserve officials, including Chairman Jerome Powell, are expected to speak and provide insights on the trajectory of US interest rates and the health of the US economy. Furthermore, the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index for May 2024, is scheduled for release on Friday. Consensus forecasts a lower print at 0.1% m/m, bolstering the chances of rate cuts this year.

However, potential gains may be limited as investors remain cautious, closely monitoring maritime developments related to the ongoing conflict in the West Philippine Sea and the continued depreciation of the Peso. Market participants will also take into account rising oil prices, with Brent and West Texas Intermediate (WTI) currently at elevated levels of USD84 per barrel and USD81 per barrel, respectively. These are expected to result in upward price adjustments, with diesel, gasoline, and kerosene projected to increase by PHP 1.55/PHP 1.85, PHP0.85/PHP 1.15, and PHP1.00/PHP 1.10, respectively.

Resistance: 6,200 / 6,400

Support: 6,000 / 5,700

ANALYSIS

The PSEi declined by -3.53% w/w to close at 6,158.48 (-225.22 pts), its lowest close YTD. The benchmark index sustained its downward bias, continuing its losing streak for eight straight days. Due to the recent selloff, the index broke below the 6,400 and 6,200 support levels and is currently hovering around oversold level with RSI at 27.44. The index may rebound to pare its losses; however, bounces could be limited by role reversal around the broken previous support (6,400 to 6,200). If the bearish sentiment continues, the nearest support is the retest of its low at around 6,000, then the low at 5,700.

STOCK CALLS FOR THE WEEK

Union Bank of the Philippines, Inc.* TRAILING STOPS | CONSENSUS TARGET PRICE: PHP 49.12

Union Bank of the Philippines, Inc. (UBP) has been on a long-term downtrend since its January 2023 high of PHP 75.73, declining by as much as ~57%. It is currently trading below key moving averages (50-day, 100-day, and 200-day) with momentum indicators (RSI and MACD) showing signs of near-term strength. However, clear signs of basing and a potential reversal have yet to form while a potential retest of its recent low is in play. Thus, trailing stops are recommended. For those who availed of the SRO, implementing trailing stops is advisable to secure gains. Investors who want to accumulate can wait for clearer signs of a reversal.

MREIT, Inc.* BUY ON PULLBACKS | FMSEC TARGET PRICE: PHP 14.06

MREIT Inc. (MREIT) has been range-trading in the last three months between PHP 12.50 to PHP 13.26. Currently, the stock is hovering below the 50-, 100-, and 200-day moving averages. For a more favorable risk-reward ratio, accumulate once the stock pulls back around PHP12.5 support level. Accumulate once MREIT pulls back around PHP 1 2.5 to lock in yields up to 7.84% based on our estimates. Set stop loss limit order around PHP 11.5 and take profit around PHP14.38. For long-term investors, we have a fundamental target price for MREIT at PHP 14.06 (+11.23% upside from recent close).

DoubleDragon Corp.* TRAILING STOPS | CONSENSUS TARGET PRICE: NO CONSENSUS TARGET PRICE

DoubleDragon Corp. (DD) has been trading in a steep upward channel since its price surge out of the consolidation phase. As of current levels, DD is hovering above all its key moving averages (20-day, 50-day, 100-day, and 200-day). For those with profitable positions, it is advisable to take advantage of the upticks and consider selling, as the stock borders on overbought conditions. A healthy correction is likely, especially if the stock breaks down from its current upward channel. Additionally, profit-taking is expected as the stock trades near its multi-year peak of ~PHP 13.00. We recommend accumulating once a proper support level is established. For those with profitable positions, it is advisable to begin taking profits or implement trailing stops. Consider adding more positions once the stock price stabilizes and establish support around the PHP 10.00 level.

KEY DATA RELEASES

1. PH Interest Rate Decision on Thursday, June 27, 2024 (est. 6.5%; prev. 6.5%);

2. US Durable Goods Orders m/m for May 2024 on Thursday, June 27, 2024 (est. 0.3%; Apr: 0.7%);

3. US Initial Jobless Claims as of 21 Jun 2024 on Thursday, June 27, 2024 (est. 240k; prev. 238k);

4. PH Budget Balance for May 2024 on Friday, June 28, 2024 (est. -PHP115.05bn; prev. PHP42.7bn); and

5. US Core PCE Price Index for May 2024 on Friday, June 28, 2024 (est. 0.1%; Apr: 0.2%).