Hang Seng set for third and final plunge, analysts warn
Global market troubles likely to extend into summer
Nick Westra 3 May 2009
Do not be carried away by the recent market rally, since investors could sell in May and go away, analysts warn. This view is backed by their charts, which are pointing to an overbought market ready for the third major dip since October.
It is still too early for a sustainable recovery because markets are stuck in the bottoming-out phase, says Martin Marnick, head of trading at Helmsman Global Trading. After hitting a low in October and revisiting it in early March, the Hang Seng Index may slide to a third bottom this summer before finally mounting a long-term rebound.
“The bears are not as strong as they used to be, but the bulls have had a sprint and now they need to catch their breath,” Mr. Marnick said. “This rally has been too fast and too hard to be sustained.”
Global equity markets have roared back to life over the past two months, fuelled by innovative government rescue plans and tentative signs of economic recovery. But the rally has started to encounter stiff resistance; the Hang Seng has repeatedly failed to break through the 16,000-point level despite closing above 15,500 six times in the past 13 trading sessions.
Using the example of the dotcom crash, Mr. Marnick said market collapses tended to go through an extended bottoming-out process that took about a year and usually involved three clear low points.
The first in the current crash came in October following the shake-up on Wall Street that toppled Lehman Brothers and Merrill Lynch. The second occurred earlier this year when the capital needs of bank giant Citigroup, insurer AIG, US carmakers and other heavyweights spooked the market. The third low point has yet to happen, but a slew of data suggests that it may be just around the corner.
The Hang Seng has already hit a wall at the 16,000-point level and recent readings of the “moving average convergence/divergence” (MACD) technical measurement confirm the rally has slowed.
Do not let the acronyms scare you. MACD actually compares the difference between long-term and near-term moving averages of a security’s value, with higher near-term levels indicating bullish sentiment.
The market may also be losing support at its current value since the relative strength index (RSI) has started to decline even though the Hang Seng Index is still trading around a four-month high. RSI is a comparison of the extent of gains and losses of a security over a period, with higher values signalling excessive buying interest, or in other words, an overbought market.
A pullback also seems likely given fundamental concerns about the restructuring in the US auto sector, capital positions of global banks and the potential impact of swine flu.
The Hang Seng has already zoomed up 30.19 per cent since March 6, so the old market adage “sell in May, go away” could ring true for many investors.
“It’s not going to be a sharp downward move, it’s going to be [more] of a rolling depressing move,” Mr. Marnick said. “What will happen in the summer months is waning volatility, waning volumes, [and] share prices are going to go lower - we’re going to be forming a more substantial base for a year-end rally.”
The Hang Seng may also be due for some consolidation in the absence of any positive jolt to the market. After failing to breach the 16,000 level this time around, the index has now missed that mark for more than six months.
“The Hang Seng Index [has been] locked in a large range,” said Linus Yip, a strategist with First Shanghai Securities. “So unless it can have a significant breakthrough of the 16,000 level, we will be stuck in this range.”
Mr. Marnick said the Hang Seng might trade within a range of 11,000 to 15,000 points over the next few months and could hit its third bottom in August or September before mounting a more sustainable rebound. The stabilisation process in that case will have taken nearly a year.
And while he did not rule out the possibility of an even longer recovery time, he said it was a less likely scenario.
“Common sense says it’s going to be a triple dip because we’re seeing terrible numbers, but they’re not as terrible as the ones that we saw before,” Mr. Marnick said. “We have put a lot of stimulus money into work here, and it is starting to work.”
Mr. Marnick said the notion of a triple dip was supported by a combination of fundamental factors, technical analysis and common sense.
The fusion of disciplines made the forecast more closely tailored to new developments in the financial downturn.
“You put all three together, you can make a judgment call. If you just use technical analysis on its own, it won’t be the goose that lays the golden egg - you need the others to interpret it,” he said.
A look at the charts shows RSI levels over the past six weeks have been at the highest since a bear market rebound in April last year.
The readings at that time reversed course and declined once concerns about unemployment and the prospect of a prolonged economic recession took hold.
And just a few weeks after that, a steady market slide followed.
Considering that RSI levels have recently dropped amid mounting uncertainties in the market, investors are bracing for history to repeat itself.
Andrew Freris, senior investment strategist (Asia) at BNP Paribas Wealth Management, said concerns about the pace of recovery meant it was still too early to suggest that markets were out of the woods.
“We don’t believe this is the sign of a firm recovery, that this signifies the end of the bear market,” he said.
Far from it, if Mr. Marnick is to be believed.
Technically speaking
Moving Average Convergence/Divergence (MACD) Comparison of the difference between long-term and near-term moving averages of an asset’s value. “Moving” averages are called so instead of a regular mean because the oldest data points are replaced with new ones as they become available. MACD generates buy and sell signals.
Relative Strength Index (RSI) Comparison of the extent of gains and losses of an asset over a set period to determine if it is overbought or oversold. Ranging between 0 and 100, a reading above 70 is considered bullish, while a reading below 30 indicates bearishness.
Resistance level Opposite of a support level, this denotes a level at which there is likely to be more sellers than buyers for a security.
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Hang Seng set for third and final plunge, analysts warn
Global market troubles likely to extend into summer
Nick Westra
3 May 2009
Do not be carried away by the recent market rally, since investors could sell in May and go away, analysts warn. This view is backed by their charts, which are pointing to an overbought market ready for the third major dip since October.
It is still too early for a sustainable recovery because markets are stuck in the bottoming-out phase, says Martin Marnick, head of trading at Helmsman Global Trading. After hitting a low in October and revisiting it in early March, the Hang Seng Index may slide to a third bottom this summer before finally mounting a long-term rebound.
“The bears are not as strong as they used to be, but the bulls have had a sprint and now they need to catch their breath,” Mr. Marnick said. “This rally has been too fast and too hard to be sustained.”
Global equity markets have roared back to life over the past two months, fuelled by innovative government rescue plans and tentative signs of economic recovery. But the rally has started to encounter stiff resistance; the Hang Seng has repeatedly failed to break through the 16,000-point level despite closing above 15,500 six times in the past 13 trading sessions.
Using the example of the dotcom crash, Mr. Marnick said market collapses tended to go through an extended bottoming-out process that took about a year and usually involved three clear low points.
The first in the current crash came in October following the shake-up on Wall Street that toppled Lehman Brothers and Merrill Lynch. The second occurred earlier this year when the capital needs of bank giant Citigroup, insurer AIG, US carmakers and other heavyweights spooked the market. The third low point has yet to happen, but a slew of data suggests that it may be just around the corner.
The Hang Seng has already hit a wall at the 16,000-point level and recent readings of the “moving average convergence/divergence” (MACD) technical measurement confirm the rally has slowed.
Do not let the acronyms scare you. MACD actually compares the difference between long-term and near-term moving averages of a security’s value, with higher near-term levels indicating bullish sentiment.
The market may also be losing support at its current value since the relative strength index (RSI) has started to decline even though the Hang Seng Index is still trading around a four-month high. RSI is a comparison of the extent of gains and losses of a security over a period, with higher values signalling excessive buying interest, or in other words, an overbought market.
A pullback also seems likely given fundamental concerns about the restructuring in the US auto sector, capital positions of global banks and the potential impact of swine flu.
The Hang Seng has already zoomed up 30.19 per cent since March 6, so the old market adage “sell in May, go away” could ring true for many investors.
“It’s not going to be a sharp downward move, it’s going to be [more] of a rolling depressing move,” Mr. Marnick said. “What will happen in the summer months is waning volatility, waning volumes, [and] share prices are going to go lower - we’re going to be forming a more substantial base for a year-end rally.”
The Hang Seng may also be due for some consolidation in the absence of any positive jolt to the market. After failing to breach the 16,000 level this time around, the index has now missed that mark for more than six months.
“The Hang Seng Index [has been] locked in a large range,” said Linus Yip, a strategist with First Shanghai Securities. “So unless it can have a significant breakthrough of the 16,000 level, we will be stuck in this range.”
Mr. Marnick said the Hang Seng might trade within a range of 11,000 to 15,000 points over the next few months and could hit its third bottom in August or September before mounting a more sustainable rebound. The stabilisation process in that case will have taken nearly a year.
And while he did not rule out the possibility of an even longer recovery time, he said it was a less likely scenario.
“Common sense says it’s going to be a triple dip because we’re seeing terrible numbers, but they’re not as terrible as the ones that we saw before,” Mr. Marnick said. “We have put a lot of stimulus money into work here, and it is starting to work.”
Mr. Marnick said the notion of a triple dip was supported by a combination of fundamental factors, technical analysis and common sense.
The fusion of disciplines made the forecast more closely tailored to new developments in the financial downturn.
“You put all three together, you can make a judgment call. If you just use technical analysis on its own, it won’t be the goose that lays the golden egg - you need the others to interpret it,” he said.
A look at the charts shows RSI levels over the past six weeks have been at the highest since a bear market rebound in April last year.
The readings at that time reversed course and declined once concerns about unemployment and the prospect of a prolonged economic recession took hold.
And just a few weeks after that, a steady market slide followed.
Considering that RSI levels have recently dropped amid mounting uncertainties in the market, investors are bracing for history to repeat itself.
Andrew Freris, senior investment strategist (Asia) at BNP Paribas Wealth Management, said concerns about the pace of recovery meant it was still too early to suggest that markets were out of the woods.
“We don’t believe this is the sign of a firm recovery, that this signifies the end of the bear market,” he said.
Far from it, if Mr. Marnick is to be believed.
Technically speaking
Moving Average Convergence/Divergence (MACD) Comparison of the difference between long-term and near-term moving averages of an asset’s value. “Moving” averages are called so instead of a regular mean because the oldest data points are replaced with new ones as they become available. MACD generates buy and sell signals.
Relative Strength Index (RSI) Comparison of the extent of gains and losses of an asset over a set period to determine if it is overbought or oversold. Ranging between 0 and 100, a reading above 70 is considered bullish, while a reading below 30 indicates bearishness.
Resistance level Opposite of a support level, this denotes a level at which there is likely to be more sellers than buyers for a security.
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