Share price corrections are normal in bull markets, they say
By Alvin Foo 31 October 2009
Stock markets endured a roller-coaster ride this week, recouping some losses yesterday after the United States posted faster-than-expected economic growth in the third quarter.
However, equities had suffered some bloodletting earlier in the week, as various indicators warned that valuations could be overstretched.
Investors were also dismayed by much less optimistic US data on consumer confidence and new home sales.
Key regional indexes reflected the week’s turbulence.
Among the more volatile was Hong Kong’s Hang Seng Index, which soared 2.29 per cent yesterday but slumped 3.7 per cent for the week.
China’s Shanghai Composite Index rose 1.2 per cent yesterday but slid 3.6 per cent for the week, while Japan’s Nikkei 225 Index jumped 1.45 per cent but slipped 2.4 per cent for the week.
Back home, the benchmark Straits Times Index gained 18.82 points, or 0.71 per cent, yesterday to 2,651.13. It was down 2.4 per cent for the week.
Despite the market gyrations, the experts do not see the sell down setting off major alarm bells.
Analysts say a pullback of up to 10 per cent may even be healthy for regional stocks, as markets have embarked on a supercharge since March, resulting in one of the strongest rallies in recent decades.
‘Share markets don’t go in a straight line, and corrections in bull markets are normal and healthy in ensuring that share markets don’t get overheated,’ said Mr. Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.
Although the headline US economic growth numbers have been encouraging, key ingredients of a sustained recovery in the US are still missing.
The job market there is still in the doldrums and American consumer spending has hardly picked up.
Another potential pitfall is interest rates which have started to rise, a key risk factor which could stem the flood of liquidity fuelling the stock supercharge.
DBS Vickers research head Janice Chua said: ‘The market needs a healthy correction as we await clearer signs of recovery and further upgrades in earnings growth momentum.’
Analysts also caution that the pace of the rally has slowed considerably, and that more volatility could ensue.
On Wednesday, major indexes in the US closed below their 50-day moving averages - a warning sign that investor sentiment could be changing.
The CBOE Volatility Index - Wall Street’s favourite fear gauge - has been moving up sharply, shooting up 12.5 per cent for its biggest one-day percentage gain since August on Wednesday.
‘The easy money has been made,’ said OCBC group wealth management vice-president Vasu Menon.
‘Future news flows will need to get much better and cross higher hurdles in order for stock markets to post significant gains.’
Where do we go from here?
DBS Vickers’ Ms. Chua said: ‘The STI still has downside bias, but the worst case should not exceed 2,400 based on technical analysis.’
Despite the looming uncertainties, many fund managers are still bullish on Asian stocks.
However, they also warn that it is best for investors to buy gradually over the coming months to ride out the volatility in markets.
Looking to the fourth quarter, analysts estimate that earnings from S&P 500 companies will rebound 65 per cent in the final quarter of this year after falling for nine straight quarters.
‘Such expectations should offer downside support to markets and allow them to head higher by year-end,’ said Mr. Menon.
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Analysts unfazed by stock market sell down
Share price corrections are normal in bull markets, they say
By Alvin Foo
31 October 2009
Stock markets endured a roller-coaster ride this week, recouping some losses yesterday after the United States posted faster-than-expected economic growth in the third quarter.
However, equities had suffered some bloodletting earlier in the week, as various indicators warned that valuations could be overstretched.
Investors were also dismayed by much less optimistic US data on consumer confidence and new home sales.
Key regional indexes reflected the week’s turbulence.
Among the more volatile was Hong Kong’s Hang Seng Index, which soared 2.29 per cent yesterday but slumped 3.7 per cent for the week.
China’s Shanghai Composite Index rose 1.2 per cent yesterday but slid 3.6 per cent for the week, while Japan’s Nikkei 225 Index jumped 1.45 per cent but slipped 2.4 per cent for the week.
Back home, the benchmark Straits Times Index gained 18.82 points, or 0.71 per cent, yesterday to 2,651.13. It was down 2.4 per cent for the week.
Despite the market gyrations, the experts do not see the sell down setting off major alarm bells.
Analysts say a pullback of up to 10 per cent may even be healthy for regional stocks, as markets have embarked on a supercharge since March, resulting in one of the strongest rallies in recent decades.
‘Share markets don’t go in a straight line, and corrections in bull markets are normal and healthy in ensuring that share markets don’t get overheated,’ said Mr. Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.
Although the headline US economic growth numbers have been encouraging, key ingredients of a sustained recovery in the US are still missing.
The job market there is still in the doldrums and American consumer spending has hardly picked up.
Another potential pitfall is interest rates which have started to rise, a key risk factor which could stem the flood of liquidity fuelling the stock supercharge.
DBS Vickers research head Janice Chua said: ‘The market needs a healthy correction as we await clearer signs of recovery and further upgrades in earnings growth momentum.’
Analysts also caution that the pace of the rally has slowed considerably, and that more volatility could ensue.
On Wednesday, major indexes in the US closed below their 50-day moving averages - a warning sign that investor sentiment could be changing.
The CBOE Volatility Index - Wall Street’s favourite fear gauge - has been moving up sharply, shooting up 12.5 per cent for its biggest one-day percentage gain since August on Wednesday.
‘The easy money has been made,’ said OCBC group wealth management vice-president Vasu Menon.
‘Future news flows will need to get much better and cross higher hurdles in order for stock markets to post significant gains.’
Where do we go from here?
DBS Vickers’ Ms. Chua said: ‘The STI still has downside bias, but the worst case should not exceed 2,400 based on technical analysis.’
Despite the looming uncertainties, many fund managers are still bullish on Asian stocks.
However, they also warn that it is best for investors to buy gradually over the coming months to ride out the volatility in markets.
Looking to the fourth quarter, analysts estimate that earnings from S&P 500 companies will rebound 65 per cent in the final quarter of this year after falling for nine straight quarters.
‘Such expectations should offer downside support to markets and allow them to head higher by year-end,’ said Mr. Menon.
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