BT: Market volatility set to remain high this week (05 Mar 2007)

Market volatility set to remain high this week

By R SIVANITHY
SENIOR CORRESPONDENT

IT'D be fair to say that the question on everyone's minds after last week's plunges is either 'shall I cut my losses?' or 'is it time to buy?' both of which are other ways of asking whether the selling that knocked 7 per cent off the Straits Times Index in four days has dried up.

In a world where equity markets are as interlinked as they are today it's impossible to tell with any certainty - who knows whether China really has stabilised or if the next blowout might come from somewhere else - though it is possible to say this: any concerted buying in the near-term would not be advisable.

First, we can say for sure that volatility is set to remain high as day traders try to first bottom-fish and then immediately look to sell into strength.

This would have been obvious from movements between last Wednesday and Friday when deep plunges were immediately followed by sharp bounces that were then violently capped.

Second, not only will the market have to cope with vastly increased intraday punting, it will have to absorb waves of forced selling and the exit of hordes of contra players.

Banks and brokers will surely take any sign of strength today and and on Tuesday to force-sell positions for which margin calls have not been met while players who bought last week hoping to make a quick contra profit and who have not yet sold would undoubtedly be queueing up today to get out because of Wall Street's Friday slide.

Third, Wall Street. The source of last week's volatility may have been China, but it is the US market which has since assumed the role of prime depressant of world equity prices.

Indeed, this was the subject of this column last week where we warned that notwithstanding the assurances of Federal Reserve chairman Ben Bernanke and the dozens of US analysts, all was not well with the US economy nor its market.

Friday's slide took US stocks to a three-month low and sent investors scurrying into the refuge of bonds - the yield on the 10-year Treasury dropped four basis points to 4.5 per cent. According to news reports, the catchword on Wall Street is now 'worse than expected slowdown' brought on by a decline in consumer confidence, a rise in mortgage delinquencies, shockingly low housing starts, slowing jobs and earnings growth, and signs of a contraction in manufacturing.

It'll certainly be interesting to see who has got it right - former Fed chief Alan Greenspan who last week warned of a possible US recession later this year or the incumbent Fed boss Mr Bernanke who continues to sing the praises of the US economy.

You could of course hold on to the widespread view that the outlook for stock markets remains positive in the medium-to-longer term. This much you would have gleaned from the various reports which have made the rounds over the past week in which the central message was that this is not the start of a bear market but merely a bull market correction.

Be that as it may, it's still worth bearing (no pun intended) in mind that bull market corrections can last for several weeks - May 2006's fall for example lasted six weeks.

For the technically-oriented, CLSA's Global Technical Research report dated Feb 28 stated that last week's significant falls point to a dramatic change in character which in turn strongly suggests that markets have peaked and that a significant 25-33 per cent correction in Asia is underway.

Based on a chart analysis of the MSCI Asia Free ex-Japan Index, CLSA said: 'The Titanic has hit the iceberg and moving your deckchair to the stern buys you some time but doesn't put you out of harm's way . . in recent weeks, we have been talking about rapidly rising risks and have advised booking some profits and tightening stops. We think it would be a mistake to bargain hunt here.'

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