Sunday, 15 February 2009
Best to maintain a short-term trading view to survive
There’s not a lot we can add to the assessment given in last week’s column (and the dozens that preceded it over the past year) that this is a market eminently suited to short-term traders who buy selectively into the dips but sell immediately into strength.
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Best to maintain a short-term trading view to survive
By R SIVANITHY
14 February 2009
SINGAPORE - There’s not a lot we can add to the assessment given in last week’s column (and the dozens that preceded it over the past year) that this is a market eminently suited to short-term traders who buy selectively into the dips but sell immediately into strength.
There’s also not a lot more that can be added to US President Obama’s Friday statement that the recovery, when it comes, will be measured in years and not months, indeed a surprisingly sobering but nonetheless honest appraisal of the economic outlook considering it came from a politician.
Speaking of outlooks, it’s difficult to find fault with Citi Investment Research’s Feb 10 Asian Macro View report titled ‘We Don’t Buy The Optimism’ where it said a second round of effects of employment losses and declining consumption in China is increasingly filtering into the region. As a result, it recommends ‘fading the rally’ or perhaps to put it bluntly, selling into strength.
‘Our regional equity strategists note that Asian earnings expectations indicated by the IBES (Institutional Brokers’ Estimates Service) forecasts remain too high...this benign earnings recovery belies the underlying economic data of sharp contraction in developed economies’ growth..’
‘Thus we think the current equity market bounce looks unsustainable and is likely vulnerable to a correction as the temporary rebound in economic data...is likely to moderate,’ said Citi.
Traders who base their strategies on movements in Hong Kong (and there are plenty of them, judging by the close correlation between the Hang Seng and Straits Times Index) or those who think that China will pull markets out of their present funk would be well-advised to note Bank of America-Merrill Lynch’s (BOAML) Feb 4 China Equity Strategy report where it said it expects the Hang Seng China Enterprise Index (HSCEI), which comprises H-shares listed in Hong Kong (or China-incorporated companies whose shares trade in Hong Kong), to test a new low of 4,200 by mid-year, some 40-odd per cent below its current level of 7,500.
The reason for this grim assessment is an expected 20 per cent downward revision in earnings which could see the index retest its trough valuation of six times forward earnings, said BOAML. It also said it thinks the HSCEI will be range bound for a few years and that a bull market is a long way away.
Stock markets however, sometimes take on a life of their own and can perform in a manner divergent from from economic expectations and much depends on large programme trades which target (we hesitate to use the word ‘manipulate’ but often it looks that way) the major indices and thus influence momentum and sentiment.
Much also depends on Wall Street, which still clings on to hope of ever-larger government handouts and is still, in our view, too overvalued despite being down 10 per cent for the year to date and about 44 per cent from all-time highs.
Just like Asian earnings forecasts, analysts are still way too optimistic about US earnings - according to Bloomberg, Friday’s Wall St slide was partly because of a worse-than-expected loss reported by financial company Wells Fargo.
However, as we noted in this column a fortnight ago, the impact of the news on the Dow Jones Industrial Average (DJIA) was much more muted than might otherwise have been expected because of the way the DJIA is constructed - since it is a price-weighted index all price movements are treated equally, which means that when already low-priced financial stocks are sold off, they cannot influence the index by much.
The STI in the meantime, although it is market-cap weighted, is very much dependent on the likes of SingTel and the three banks for its direction. The index appears reasonably resilient around the 1,700 mark but we wouldn’t put too much money into this holding for very long if US players and China players wake up to the likelihood that their markets are overvalued.
All of which is a roundabout way of repeating the advice given here before - it’s still best to take a short-term trading view in order to survive in this market.
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