We are turning positive on equity markets for the following reasons:
1. Markets are approaching major Fibonacci support levels.
The STI is close to retracing 62% of its rally from Oct 98 low of 800 to 2007 high of 3905. The 62% retracement level is 1980. The low so far is 2026. Consider this - the index took 10 years to rally to 3905 and just 1 year to lose almost 62% of that value. The retracement for stocks is even greater. At the very least, we should see some sort of a rebound. While another decline cannot be ruled out, we believe that downside would be limited to 1980 for the STI. The same goes for most other Asian markets, including Nikkei, Hang Seng (66%R at 15180) and the SET index (62% at 481). The S&P 500 and the DJIA are close to retracing 76% of their moves from 2003 lows. The weekly range on the DJIA and the S&P500 is the highest on record, suggesting that a selling climax is unfolding. The same pattern is unfolding in European markets, where FTSE index showed the highest weekly range on record amid record volatility.
2. Volatility on currency markets has spiked. It is now slowly contracting.
The Yen carry trade was the tool that facilitated much of the liquidity inflows into equities and commodities. This is now being unwound and has resulted in sharp volatility in currencies markets. Traditional interest rate differential pairs such as AUD/JPY has lost almost 40% in 3 weeks and 10 day volatility has spiked to 70% from typical 10%. This volatility is not sustainable and will have to contract. The Yen carry trade unwinding and the underlying volatility is indicative of risk aversion. As volatility in these carry trades narrow, so will the sell down in equity markets. This should lead to a reversal in equity markets.
3. Wave patterns suggest a terminal low is already in place or could be forming over the next 1-2 days.
On an intra-day basis, the DJIA could correct towards 9000 before rebounding. The downside risk for US markets is negligible in our opinion. We believe a set up is in place for a significant rebound. For the STI, we are unsure if a low is in place, but any decline form here should be limited to about 1980. The index has either completed a major wave C, low or is in the final stages of such a move. A move above 2103, would add greater confidence to the bullish case. We recommend that readers position for a rebound. Key index stocks and REITS will be the major beneficiaries. Sing Tel, which has fallen in line, with AUD should also be benefit from a rebound in AUD.
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We are turning positive on equity markets for the following reasons:
1. Markets are approaching major Fibonacci support levels.
The STI is close to retracing 62% of its rally from Oct 98 low of 800 to 2007 high of 3905. The 62% retracement level is 1980. The low so far is 2026. Consider this - the index took 10 years to rally to 3905 and just 1 year to lose almost 62% of that value. The retracement for stocks is even greater. At the very least, we should see some sort of a rebound. While another decline cannot be ruled out, we believe that downside would be limited to 1980 for the STI. The same goes for most other Asian markets, including Nikkei, Hang Seng (66%R at 15180) and the SET index (62% at 481). The S&P 500 and the DJIA are close to retracing 76% of their moves from 2003 lows. The weekly range on the DJIA and the S&P500 is the highest on record, suggesting that a selling climax is unfolding. The same pattern is unfolding in European markets, where FTSE index showed the highest weekly range on record amid record volatility.
2. Volatility on currency markets has spiked. It is now slowly contracting.
The Yen carry trade was the tool that facilitated much of the liquidity inflows into equities and commodities. This is now being unwound and has resulted in sharp volatility in currencies markets. Traditional interest rate differential pairs such as AUD/JPY has lost almost 40% in 3 weeks and 10 day volatility has spiked to 70% from typical 10%. This volatility is not sustainable and will have to contract. The Yen carry trade unwinding and the underlying volatility is indicative of risk aversion. As volatility in these carry trades narrow, so will the sell down in equity markets. This should lead to a reversal in equity markets.
3. Wave patterns suggest a terminal low is already in place or could be forming over the next 1-2 days.
On an intra-day basis, the DJIA could correct towards 9000 before rebounding. The downside risk for US markets is negligible in our opinion. We believe a set up is in place for a significant rebound. For the STI, we are unsure if a low is in place, but any decline form here should be limited to about 1980. The index has either completed a major wave C, low or is in the final stages of such a move. A move above 2103, would add greater confidence to the bullish case. We recommend that readers position for a rebound. Key index stocks and REITS will be the major beneficiaries. Sing Tel, which has fallen in line, with AUD should also be benefit from a rebound in AUD.
Best Regards
K Ajith
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