Monday, 23 February 2009
Not a market for the naive, or for the savvy
Clearly, this is not a market for the naive. Come to think of it, it may not even be suitable for the savvy. But it’s the naive who are probably the most vulnerable, although judging by the atrocious volume every day, not many players - naive or savvy - are actually taking part.
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Not a market for the naive, or for the savvy
By R SIVANITHY
21 February 2009
Clearly, this is not a market for the naive. Come to think of it, it may not even be suitable for the savvy. But it’s the naive who are probably the most vulnerable, although judging by the atrocious volume every day, not many players - naive or savvy - are actually taking part.
A naive player, for instance, might be tempted to attribute rises in the Straits Times Index to ‘bargain hunting’ or buying based on vague hopes that the US administration’s latest rescue plan will lift the economy out of recession.
If you believe this, your response might be to try to capitalise by being an early entrant and buying. But if you were to do so, you would likely suffer painful losses, because the truth is that bounces in the STI - or any stock, for that matter - are due more to short-covering than anything else.
A naive player might also be tempted to put faith in ‘overweight’ calls by brokers on stocks that have just made large cash calls. Such a player might believe the brokers’s hype that the money will be put to good use, so rights issues should be viewed positively.
But the truth is, a big cash call when the economy is as rotten as it is now is not a good signal at all. Even in normal circumstances, rights issues are earnings-dilutive and place an unwelcome cash strain on shareholders. But when the market is bad, rights issues should be seen as negative, until convincingly proved otherwise.
It would certainly be interesting to find out what DBS and CapitaLand shareholders are thinking of their rights issues now, or to ask analysts who eagerly issued ‘buy’ calls on these stocks whether they stand by their calls now that both have collapsed.
The fact of the matter is that every day, the STI is hostage to large programme trades that pre-empt - we hesitate to use the term ‘front-run’ because of its negative connotations - what Wall Street might do in the hours ahead.
So if the STI falls, you can be 90 per cent sure that the major US indices will fall later, and if the STI rises sharply, the same will probably happen on Wall Street. The relationship isn’t always perfect, but it’s pretty much spot-on on most days.
Take this week, for instance. The STI dropped 110.7 points or 6.5 per cent to 1,594.94, of which 34.41 points were lost yesterday.
Some of the daily moves here even went against the direction of Hong Kong’s Hang Seng Index - surely a surprise given the close correlation between that index and the STI. But in every instance, the STI’s rise or fall correctly predicted how the US benchmarks would move later that day. So you have to wonder: Are programme trades ‘front-running’ the STI because it’s easy to rig?
The other notable feature of the market has been a rapid drying-up of liquidity, from around $800 million a day in early February to about $600-plus million this week. To some, the low volume is a consolation, but we would like to say to traders who justify large paper losses by saying they are in for the long term that a fall is a fall - and high or low volume makes no difference.
The best advice we can offer is the same as that which we have been offering for months: If you want to buy into dips, make sure you sell quickly into strength. This is not a normal, run-of-the-mill bear market, so don’t treat it as such.
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