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Thursday, 25 June 2009
Will the upward trend continue to bend?
Last week’s column recommended investors to be aware of what could cause the upward trend to bend, which as it turned out, was probably timely advice given the sharp fall over the week.
Last week’s column recommended investors to be aware of what could cause the upward trend to bend, which as it turned out, was probably timely advice given the sharp fall over the week.
To be perfectly honest though, since the Straits Times Index had already risen almost non-stop for three months and had gained 65 per cent in the process (or almost 1,000 points), a 5 per cent loss over two weeks should not be of much concern, at least not to the bulls who have spoken convincingly about ‘green shoots’ taking root and sprouting into a V-shaped recovery.
Most reasonable observers should therefore not be concerned (some might even describe the fall as a ‘much-needed correction’) because it would be ludicrous to expect prices to continue going up in a straight line every week. Moreover, when penny stocks under 10 cents start to move in high volume, then the contrarian in all of us would see it as a sign of the market overheating.
Yet you get the feeling that in the current climate where the fuel for the strong gain has come from more momentum, liquidity and hope more than any substantive improvement in the underlying economics, there is a definite sense of unease floating around because of the correction of the past fortnight.
The source of this unease is a nagging worry that prices may have overshot on the upside, especially if the recovery is not as V-shaped as many brokers are hoping it would be.
Of longer-term concern is the knowledge at the back of the mind that you can’t keep printing money, running up huge deficits indefinitely and bailing out failed industries because sooner or later, there has to be payback. Whether this comes in the form of a crashing US dollar, rising interest rates via a collapsed bond market and/or inflation, remains to be seen.
Much of course, depends on your view of the future and whether you prefer to view the glass as half full or half empty because for almost every green shoot there is an equivalent brown weed.
Take for example the US Federal Reserve’s survey of the economy known as the ‘beige book’ that was released a little more than a week ago and revealed that in five of the Fed’s 12 regions, ‘the downward trend is showing signs of moderating’. Because it was in the mood to see the glass as being half full, Wall Street took this as a cue to buy.
However, the flip side of the data actually means that in seven of the 12 regions, that is, the majority, there were no signs of improvement and the downward trend may even be gathering pace.
The same ‘half full/half empty’ theme is present in many other areas of the US economy. In employment for instance, the US Labor Dept recently reported that initial claims for unemployment benefits declined 24,000 to 601,000, data which optimists took as a fresh sign of improvement.
However, as pointed out in US newspaper Barron’s June 15 issue, continuing claims, or those made by people out of work for more than a week, shot up by 59,000 to 6.8 million, the highest since 1967 which is when the data started to be compiled.
There’s more, but suffice to say that the present approach by US officialdom, which is to try restore confidence in the system before actually restoring the system, might run into trouble sooner or later.
Still, there are enough ‘buy’ calls floating around with extravagant upward targets to keep the bulls happy and interest alive. Houses like Nomura, Credit Suisse, Citi Investment Research and UBS Investment Research (UBSIR) have all issued positive calls on the local market over the past few weeks, with UBSIR last week saying it would be premature to declare the rally over because valuations are not expensive and liquidity remains high, while Citi made headlines with a 2,700 target for the STI.
A little less ambitious - and possibly less gung-ho - is Merrill Lynch, which said that although it is long-term positive on Asia ex-Japan, the correction should continue because prices have overshot their fundamentals. Morgan Stanley said its global economics team is forecasting only a tepid recovery.
Savvy investors would probably note the diversity of views available as suggesting not all is as green as some would have them believe and that it might be prudent to take a little money off the table while waiting to see if the trend continues to bend.
2 comments:
Will the upward trend continue to bend?
By R SIVANITHY
22 June 2009
Last week’s column recommended investors to be aware of what could cause the upward trend to bend, which as it turned out, was probably timely advice given the sharp fall over the week.
To be perfectly honest though, since the Straits Times Index had already risen almost non-stop for three months and had gained 65 per cent in the process (or almost 1,000 points), a 5 per cent loss over two weeks should not be of much concern, at least not to the bulls who have spoken convincingly about ‘green shoots’ taking root and sprouting into a V-shaped recovery.
Most reasonable observers should therefore not be concerned (some might even describe the fall as a ‘much-needed correction’) because it would be ludicrous to expect prices to continue going up in a straight line every week. Moreover, when penny stocks under 10 cents start to move in high volume, then the contrarian in all of us would see it as a sign of the market overheating.
Yet you get the feeling that in the current climate where the fuel for the strong gain has come from more momentum, liquidity and hope more than any substantive improvement in the underlying economics, there is a definite sense of unease floating around because of the correction of the past fortnight.
The source of this unease is a nagging worry that prices may have overshot on the upside, especially if the recovery is not as V-shaped as many brokers are hoping it would be.
Of longer-term concern is the knowledge at the back of the mind that you can’t keep printing money, running up huge deficits indefinitely and bailing out failed industries because sooner or later, there has to be payback. Whether this comes in the form of a crashing US dollar, rising interest rates via a collapsed bond market and/or inflation, remains to be seen.
Much of course, depends on your view of the future and whether you prefer to view the glass as half full or half empty because for almost every green shoot there is an equivalent brown weed.
Take for example the US Federal Reserve’s survey of the economy known as the ‘beige book’ that was released a little more than a week ago and revealed that in five of the Fed’s 12 regions, ‘the downward trend is showing signs of moderating’. Because it was in the mood to see the glass as being half full, Wall Street took this as a cue to buy.
However, the flip side of the data actually means that in seven of the 12 regions, that is, the majority, there were no signs of improvement and the downward trend may even be gathering pace.
The same ‘half full/half empty’ theme is present in many other areas of the US economy. In employment for instance, the US Labor Dept recently reported that initial claims for unemployment benefits declined 24,000 to 601,000, data which optimists took as a fresh sign of improvement.
However, as pointed out in US newspaper Barron’s June 15 issue, continuing claims, or those made by people out of work for more than a week, shot up by 59,000 to 6.8 million, the highest since 1967 which is when the data started to be compiled.
There’s more, but suffice to say that the present approach by US officialdom, which is to try restore confidence in the system before actually restoring the system, might run into trouble sooner or later.
Still, there are enough ‘buy’ calls floating around with extravagant upward targets to keep the bulls happy and interest alive. Houses like Nomura, Credit Suisse, Citi Investment Research and UBS Investment Research (UBSIR) have all issued positive calls on the local market over the past few weeks, with UBSIR last week saying it would be premature to declare the rally over because valuations are not expensive and liquidity remains high, while Citi made headlines with a 2,700 target for the STI.
A little less ambitious - and possibly less gung-ho - is Merrill Lynch, which said that although it is long-term positive on Asia ex-Japan, the correction should continue because prices have overshot their fundamentals. Morgan Stanley said its global economics team is forecasting only a tepid recovery.
Savvy investors would probably note the diversity of views available as suggesting not all is as green as some would have them believe and that it might be prudent to take a little money off the table while waiting to see if the trend continues to bend.
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