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Straits Times 3,126.14 -8.57 -0.27%
Hang Seng 26,848.49 +184.21 +0.69%
Dow Jones 27,019.23 +17.25 +0.06%
Shanghai Composite 2,977.33 -1.38 -0.05%
STI May Face Near Term Pullback After Breaking Uptrend
Perspective | 13 February 2013
By: Ernest Lim
Articles (134) Profile

Most Asian indices rose in the past two weeks on stronger than expected US corporate earnings. However, this positive news was offset by caution sounded by the European Central Bank that the strength in European currency may hamper an economic recovery. See Table 1 below for the indices’ performances over the past two weeks.

Table 1: Indices’ performance over the past two weeks

Source: Bloomberg; Ernest’s compilations

Based on data compiled by Bloomberg, about 75 percent of the 341 companies in the Standard & Poor’s 500 (S&P500) have beaten earnings. This week, we shall see corporate results from Coco Cola Co., PepsiCo Inc and Kraft Foods Group Inc etc.

Two weeks ago, I mentioned that the S&P500 chart looks rather healthy underpinned by the broad market strength in both large and small caps stocks. Last Friday, it closed at another five year high at 1,518, up 1 percent for the past two weeks. If we look into the price action of the S&P500, S&P500 closed down 17 points to 1,495 on 4 February versus 1 February. On 5 February, it reversed almost all the losses on 4 February during intraday trading and closed at 1,511, not far off the intraday high. On 6 & 7 February, S&P500 touched an intraday low of 1,505 and 1,498 respectively but closed way off the lows. This is indicative of a strong market sentiment where investors do not find any compelling reason to sell stocks (except to take some profit). Furthermore, there seems to be buying interest on dips. (See Chart 1 below)

Chart 1: S&P500 notched a five year high. Next up, resistances at 1,526 & 1,549-1,555

Source: CIMB itrade complimentary chart (8 Feb 13)

Although there is some hoo-haa over the Dow reaching 14,000 and S&P500 closing at a five year high, based on valuations compiled by Bloomberg, S&P500 trades at 15x reported earnings which is still a tad lower than the average of 16.6x since 1954.

Notwithstanding the above, it is noteworthy that most indicators such as MFI, MACD and RSI are exhibiting bearish divergences with S&P500, which may indicate that the uptrend may not be sustainable in the short term. Nevertheless, against the backdrop of strong price action, I would remain net long on stocks but would seek to (partially) take profit on some stocks, so as to conserve cash to buy on dips. Generally, I remain constructive on equities over the course of the year.

For the Straits Times Index (STI), according to my charts, it has broken the uptrend line formed since 16 November 2012. Coupled with MFI, MACD and RSI’s bearish divergences, there is a more than 50 percent chance that STI may face a near term pullback. Supports are seen around 3,250, 3,231-3,235 and 3,196-3,205 with 3,196-3,205 being a strong support in the near term. However, a climb above the green rising trend line with volume expansion would negate my bearish near term view.

Chart 2: STI broke the uptrend line formed since 16 November 2012

Source: CIMB itrade complimentary chart (8 Feb 13)

Notwithstanding the near term bearish view on STI, there are trading opportunities for stocks which are going to release results. Examples may be Eratat, Nam Cheong etc with the latter having a higher chance as it is followed more closely by the investment community. Readers who are interested to know more about the companies can email me at crclk@yahoo.com.sg so I can send you their financial results and analyst reports.

Two weeks ago, I mentioned (to my clients) that Eratat’s near term support around $0.121 to $0.123 should hold in the near term, after breaking the support of $0.137. It held around $0.125 to $0.126. Based on the charts, it seems to be forming a flag. It will be bullish if it can break $0.130 to $0.134 with volume expansion. With its upcoming 4Q results to be announced in the next couple of weeks (likely to be strong on a year on year comparison), odds are higher of an upside breakout as compared to a downside breakout. An upside breakout would point to an approximate measured target of around $0.162.

Best wishes to you and your loved ones in the Snake year ahead!

Please note that the above is my personal opinion and may not cater to your specific risk profile etc. The question of when to buy / sell and what to buy / sell differs greatly from individual to individual. Furthermore, it is extremely important to bear in mind that the market outlook is never static. It can change suddenly if there are sudden big events unfolding from the market – some events can happen as quickly as a few hours.

STI supports and resistances are:

Current: 3,270.30

Support 1: 3,259

Support 2: 3,249-3,250

Support 3: 3,231

Support 4: 3,221

Support 5: 3,205

Resistance 1: 3,279

Resistance 2: 3,295-3,300

Resistance 3: 3,310-3,314

Resistance 4: 3,320

Resistance 5: 3,350

*Supports and resistances are not static levels. They may be subject to change daily.

*Summary of Economic Calendar for the Week ahead (SIN time)

11 Feb, Mon: (EUR) Eurogroup Meetings; (USD) FOMC Member Yellen Speaks;

12 Feb, Tues: (EUR) ECOFIN Meeting / ECB President Draghi Speaks; (USD) FOMC Member George Speaks / President Obama State of the Union Speech;

13 Feb, Wed: (EUR) Industrial Production; (USD) Core Retail Sales / Retail Sales / Crude Oil Inventories / FOMC Member Bullard Speaks;

14 Feb, Thurs: (JPY) Prelim GDP / Monetary Policy Statement / BOJ Press Conference; (EUR) French, German & Italy Prelim GDP q/q / Europe Flash GDP q/q; (USD) Unemployment Claims / FOMC Member Tarullo Speaks / FOMC Member Bullard Speaks;

15 Feb, Fri: (GBP) Retail Sales; (USD) Prelim UoM Consumer Sentiment; (ALL) G20 Meetings Day 1;

16 Feb, Sat: (ALL) G20 Meetings Day 2;

*All economic data especially China data (if any) are subject to changes without notice. The above list is not exhaustive. I have merely listed the economic data which I feel has more impact to the market.

**Singapore market is closed for Mon & Tues. Hong Kong market is closed from Mon – Wed. China market is closed for the week.

Please refer to Forex Factory Calendar for a more detailed list of economic events.

P.S: The above is part of a bi-weekly newsflash which I send out to my clients on a weekend.

All the best for your investment and trading!

Information sources: Various sources such as Bloomberg, Dow Jones, Forex calendar, Zacks Investment Research, Reuters, SGX, Yahoo Finance, and Business Times etc.

Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

Please click here for more information about this author.


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