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Business As Usual: Normal Service Resumes After Lull Period
Perspective | 26 February 2010
By: Gabriel Gan
Articles (141) Profile

The stock market endured what has been the traditional selloff before the Lunar New Year. Each of the past three years just before the Lunar New Year has not been good for investors, with even more selling taking place after the festive period.

Even last year when the stock market witnessed a powerful rally starting from March, it was down all the way after February’s Lunar New Year. This year, however, by virtue of the stock market holding rather well, it seems to be different

Coincidentally, the months of March have been good for investors since 2006, as the stock market has tended to rally every time we move into the “auspicious” month. The Straits Times Index (STI) rose 3% in March 2006, more than 10% in March 2007, closed flat in March 2008 despite the year being hit by the Financial Crisis, and gained around 8% in March 2009.

Judging by past trends, it looks like investors may just find March 2010 to be just as rewarding.

We have also endured the traditional lull period, pre- and post-Lunar New Year, but trading volume has just started to pick up with the opening of the Shanghai stock market after a one-week break. It is now business as usual for all market participants, especially for those who have been sitting on the sidelines, awaiting clearer direction.

Basically, investors do not expect 2010 to repeat the rally we experienced in 2009 simply because nobody is expecting the global economy to grow exponentially this year. With the strong recovery already behind us and the 2009 rally now undergoing a correction, future stock market direction will depend much on future economic data – one that will continue to throw up a concoction of good and bad news.

More Wood Stronger Fire

We all know that the more wood you feed a fire, the stronger the latter will become. With so much wood being fed into the fire in 2009, global governments have done enough to stoke the fire. We are now waiting for other market participants – apart from the governments – to continue fanning the flames.

With so much wood going into the fire, it is no wonder that the stock market rallied at a steep gradient of some 45-degrees last year. If there is less wood going into the fire, or if future economic data fails to stoke the fire, then we are unlikely to see the stock market rallying steeply.

Most investors now expect 2010 to be a year of slow growth, which means that the stock market will probably move higher but at a gentler pace.

But, once again, the majority is always wrong and the stock market is the epitome of unpredictability. We will never know what may happen further down the road, as we analyze new data and situations as and when they arise.

The January US unemployment rate of 9.7% – a marked improvement from previous months – threw up a positive surprise while the Fed’s decision to rate the discount rate by 25 basis points did catch many people unaware, although Chairman Ben Bernanke had warned the market about such a move.

Still, the hiking of the discount rate failed to dampen the sentiment as investors are more focused on the Fed funds rate and not the former. Despite this, we must still be watchful of future interest rate directions because we are entering the tightening cycle, as I had warned in previous issues.

A Tale Of Two Countries

President Obama and Chairman Bernanke would probably welcome the headache that is facing President Hu and Premier Wen.

While the Chinese government is trying hard to prevent the economy, especially the property sector, from overheating, the US government is still struggling to create the much needed jobs to fuel economic growth. Earlier, President Obama launched a package that will help small-and-medium enterprises get the credit that they need to expand their businesses, and had on 24 February announced a US$15 billion plan to create jobs. These are positives and should be viewed favourably while Chairman Bernanake had on 24 February reiterated his desire to keep interest rates low for an extended period of time.

While one is trying hard to rein in the economy, the other is trying to jumpstart growth, which means that global economic growth is uneven. Now that the European Union will pump in more money to prop up the likes of Greece, Portugal and Spain, we can be quite sure that stimulus measures will not be withdrawn prematurely.

When China announced policies to raise the Chinese banks’ reserve ratio, it caused stock markets to correct because investors were not prepared for it. After months of speculation and mental preparation, investors are now able to handle more tightening measures, which means that the stock market will continue to rally after policies have been introduced and markets will fall when rumours of fresh tightening surfaces.

This is likely to be the hardest to handle because we will never know when the Chinese government will tighten, but we should look at property sales and prices as well as inflation figures. By not increasing interest rate and only increasing the banks’ reserve ratio, we can be sure that the Chinese government is not concerned about the economy inflating into a bubble. It is only the property sector that they are concerned about.

Rally Should Continue But New Highs Tough

In view of the favourable sentiment as well as the recent correction, the likelihood of the stock market continuing its rally has increased.

The Dow Jones Industrial Average (DJIA) has recovered from a low of 9,835 to a recent high of 10,438 while the Hang Seng Index (HSI) has recovered some 1,000 points after reaching a low of 19,500.

For local investors, the STI has recovered about 100 points from its recent low of 2,665 to reach a high of 2,782. Should the STI hurdle past 2,800, the next target will be 2,850 where there is a gap waiting to be covered. The key support remains at 2,665 while the resistance stays at 2,850 followed by 2,950.

So far, earnings announcements have been favourable while historical trends suggest that a rally in March is possible. Unless some major negative news surface, we should be looking at 2,850 and 2,950 instead of 2,665. However, a sustained rally above 2,950 seems unlikely unless the auspicious month of March surprises all of us.

It is now business as usual for all of us.

Garbriel Gan is a Senior Vice President at DMG & Partners Securities and is featured across a wide media net

Please click here for more information about this author.

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