BT: Still early days for markets to recover (07 Aug 2007)
CHART POINT
Still early days for markets to recover
FOLLOWING the market rout last week, many die-hard bulls were wondering last Friday whether it was safe to step back into the water. After all, the US sub-prime mortgage issue has been lingering for months, while the Straits Times Index has rebounded smartly each time there was a sharp selldown since March this year. The answer yesterday was quick and brutal, as the STI unloaded another 130 points or 4 per cent in sympathy with Wall Street's 281-point plunge.
On the local front, the writing was already on the wall a few weeks back when four uncannily accurate 'street indicators' were flashing red but were roundly ignored as the STI continued to scale new peaks:
1. Some smart money has been bailing out of stocks;
2. Frenzied trading in the third-liners as speculators chased the share prices of hitherto obscure companies on rumours of reverse takeovers or asset injections without giving much thought to the viability, pricing or credibility of the business deals. This brings to mind the heady days in the 1990s of companies securing gaming licences in Heilongjiang, China; timber concessions in Solomon Islands; and huge gold deposits in Kalimantan, only for their stock prices to crash spectacularly soon after;
3. A slew of private placements to a few individuals, sometimes at outrageous discounts that are more akin to rights issues; and
4. The intense competition among research houses as each tried to 'outperform' the rest by coming up with increasingly lofty valuations and even higher target prices.
All these are possible only if the wave of liquidity flooding the equity markets continues to flow in. However, much of the liquidity stemming from hedge funds and private equity funds that have been supporting higher stock prices is not hard cash but leveraged credit. With the ongoing credit crunch in the US and its global repercussions, there is growing concern that this 'borrowed' liquidity may be tightened or even withdrawn, resulting in a rollback in equity markets. Hence, we believe that it is still early days to conclude that the markets have already priced in the US housing loan problems (in fact, it just got started) and we expect further volatility and weakness in the weeks ahead before stability is restored.
For the week ahead, markets will focus attention on the FOMC meeting to see if the Fed tones down on its hawkish inflation stance as most of the recent US economic data and production surveys have missed expectations, suggesting some weakness in the economy. Any sign that the Fed may ease back on interest rates later this year could at least provide some temporary relief to the ravaged equity/ credit markets.
On the technical front, the STI has breached its 100-day moving average support for the first time since August 2006. While we have expected the STI to correct in a three-wave reversal pattern, we had not anticipated the speed and ferocity of gyrations which saw the market accomplish its down-wave A and rebound wave B in just four days before embarking on wave C, which is headed towards the 3,220-level, coinciding with the 200-day moving average as well as the 61.8 per cent retracement of the March-June rally. Momentum indicators are currently grossly oversold, but expect any technical rebound to be short-lived with upside capped at 3,480. -- Kelive Research
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
Still early days for markets to recover
FOLLOWING the market rout last week, many die-hard bulls were wondering last Friday whether it was safe to step back into the water. After all, the US sub-prime mortgage issue has been lingering for months, while the Straits Times Index has rebounded smartly each time there was a sharp selldown since March this year. The answer yesterday was quick and brutal, as the STI unloaded another 130 points or 4 per cent in sympathy with Wall Street's 281-point plunge.
On the local front, the writing was already on the wall a few weeks back when four uncannily accurate 'street indicators' were flashing red but were roundly ignored as the STI continued to scale new peaks:
1. Some smart money has been bailing out of stocks;
2. Frenzied trading in the third-liners as speculators chased the share prices of hitherto obscure companies on rumours of reverse takeovers or asset injections without giving much thought to the viability, pricing or credibility of the business deals. This brings to mind the heady days in the 1990s of companies securing gaming licences in Heilongjiang, China; timber concessions in Solomon Islands; and huge gold deposits in Kalimantan, only for their stock prices to crash spectacularly soon after;
3. A slew of private placements to a few individuals, sometimes at outrageous discounts that are more akin to rights issues; and
4. The intense competition among research houses as each tried to 'outperform' the rest by coming up with increasingly lofty valuations and even higher target prices.
All these are possible only if the wave of liquidity flooding the equity markets continues to flow in. However, much of the liquidity stemming from hedge funds and private equity funds that have been supporting higher stock prices is not hard cash but leveraged credit. With the ongoing credit crunch in the US and its global repercussions, there is growing concern that this 'borrowed' liquidity may be tightened or even withdrawn, resulting in a rollback in equity markets. Hence, we believe that it is still early days to conclude that the markets have already priced in the US housing loan problems (in fact, it just got started) and we expect further volatility and weakness in the weeks ahead before stability is restored.
For the week ahead, markets will focus attention on the FOMC meeting to see if the Fed tones down on its hawkish inflation stance as most of the recent US economic data and production surveys have missed expectations, suggesting some weakness in the economy. Any sign that the Fed may ease back on interest rates later this year could at least provide some temporary relief to the ravaged equity/ credit markets.
On the technical front, the STI has breached its 100-day moving average support for the first time since August 2006. While we have expected the STI to correct in a three-wave reversal pattern, we had not anticipated the speed and ferocity of gyrations which saw the market accomplish its down-wave A and rebound wave B in just four days before embarking on wave C, which is headed towards the 3,220-level, coinciding with the 200-day moving average as well as the 61.8 per cent retracement of the March-June rally. Momentum indicators are currently grossly oversold, but expect any technical rebound to be short-lived with upside capped at 3,480. -- Kelive Research
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
posted by mrmoon at 4:06 AM
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