By Hong Liang (China Daily)
Updated: 2008-04-29 07:31

If you have got nothing better to do on a rainy Sunday afternoon, get onto the Internet and read the stock comments. They can be most entertaining, provided you do not have any money in the stock market at this point in time.

As a business reporter, I have covered stock markets in different cities. At no time in my career have I seen so much obsession with the so-called "psychological barrier", a term referring to the benchmark index at any specific level that is considered a resistance to further movements either up or down as the case may be.

It all sounds so exciting, just like reading a war story in which the commander-in-chief draws a line in the sand with orders to his troops to defend it to the last man. But nobody has ever explained to me how those stock index barriers came about and who were responsible for defending them.

And yet we keep reading about these barriers, or resistance levels, all the time in stock market reports and commentaries. Perhaps some secretive gnomes, armed with unlimited reserves of cash and scripts, are directing the battle from their hideout in the basement of the stock exchange. But that is only my imagination.

Seriously, those so-called "psychological barriers", whether they are at 3,000 or 6,000, as in the case of the Chinese stock market, mean absolutely nothing. If you read the stock market commentaries regularly, as I do, you will find that there is always a new line of defense after the previous one was broken through.

In the heydays of the stock market not too long ago, a big case was made of the resistance level at 6,000. Such talks had apparently misled many investors to believe that the bull run would be unstoppable after the index broke through the 6,000 mark without any evidence of resistance.

Before our stock market strategists could agree on the next resistance level, the market made an abrupt u-turn. As the index raced downhill, it was supposed to hit roadblocks at about every 100 points or so on the way down. The spacing of these "barriers" seemed to depend more on the whims and gut feelings of the stock pundits than on hard economic facts.

At one time, the 4,000 mark was considered the last line of defense against a free bear run. When that was breached, again without much sign of resistance, the pundits immediately shifted the line to 3,500 and then 3,000.

A young investor interviewed recently by our reporter in Shanghai said that she actually believed in the myth associated with "resistance" levels and topped up on her share investment when the index slid to slightly above 4,000. Now, the index is nearing the latest line of defense at 3,000, but instead of buying, she is actually considering selling.

Earnest-looking stock analysts in suits and ties are ready to defend the notion of the "resistance level" by noting that it is underlined by a widely used method of evaluating stock markets. The stock market average price to earnings ratio tends to move in tandem with the index. The "resistance level", they argue, indicates a price point at which the market is perceived to be either under- or over-valued.

But that formula ignores the other variables, including economic outlook, earnings expectations and, in the case of China, the amount of overhanging scripts, that can have an equal, or a bigger, impact on investment considerations. What is more, how do we measure investors' sentiment? Without a reliable tool to do that, a "psychological barrier" is nothing more than just another stock market myth.

E-mail: jamesleung@chinadaily.com.cn

(China Daily 04/29/2008 page8)