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Technical Indicators Look Precarious For Asian Markets Even As Dow Hits New Highs
Perspective | 05 April 2013
By: Gabriel Gan
Articles (41) Profile

It is yet another solid fortnight for the US market as the Dow Jones Industrial Average (DJIA) touched new highs while the S&P 500, too, touched fresh closing highs at levels not seen since October 2007. During the fortnight, the DJIA surged ahead to reach 14,684 points on brighter prospects of the US economy only to be disappointed on 3 April when the services sector showed that the growth in the US economy was not as strong as expected while the private sector added less jobs than expected in the month of March.

The triple-digit drop in the DJIA, while not the first time in recent weeks, resembled the correction on 20 February when the index fell 200-odd points to 13,784 points only to recover almost immediately to move higher.

The S&P 500 also took a while to reclaim highs not seen since October 2007 but still lagged the DJIA which breached multi-year highs quite some time ago. On the very same day the S&P 500 returned to 2007 highs, an ominous correction took place and the correction in this broader-market index immediately after touching multi-year highs is more worrisome.

With the US stock market already at historical highs, it is susceptible to downside as shown by the correction on 3 April when the US services sector and private sector employment showed weaknesses. This serves as a minor wake up call to investors who by now are very used to thinking that the US stock market will never fall simply because the Fed (Federal Reserve) is still pumping an endless amount of liquidity into the financial system.

If we paused to think for a while, it is definitely a good thing for the stock market to continue rising so that everyone can make money but corporate profits in the fourth quarter warned us that things are not looking too good and, unless the first quarter surprises us on the upside, how far can the US stock market go on without a meaningful correction?

Asian Markets Moving Its Own Way

With the exception of Japan, which had just announced the first policy decision under new Bank of Japan governor Haruhiko Kuroda where he announced the buying of US$74 billion worth of bonds a month, the rest of the Asian markets paint a less-than-rosy picture.
While Japan has joined the ranks of the US in seeking solace in the printing machines, China, Hong Kong and Singapore are actually fighting a battle against runaway property prices. For many years, investors are so used to stimulus measures so much so that stock markets do not move unless there are stimulus cocktails available to intoxicate investors into buying more and more equities.

Investors are now worried that China, which depends on the property- and property-related sector for almost one-fifth of its GDP (gross domestic product), may take extra steps to curb property prices after a series a policies failed to cool prices. Similarly in Hong Kong and Singapore, the savvy investors are already out of the market after watching a series of curbs introduced to cool the property market but it is getting worrisome if government policies have so far failed to work. Will more drastic measures be introduced? Will the bubble become too big that a downturn in the global economy be the final needle that burst the bubble?

As mentioned in last issue’s article, Asian markets need to climb higher before the US market loses steam. During the fortnight, however, China and Hong Kong failed to do so and ended up even lower while Singapore managed to climb above 3,320 to as high as 3,324 points on 3 April before pulling back the following day.

Hang Seng Index

The Hang Seng Index (HSI), after trading as high as 23,944 points in early February, has lost almost 1,600 points over two months. During the process, there were a series and ups and downs but each high failed to cross 23,944 points while each low became lower and lower after experiencing technical rebounds. The index is now firmly on a downtrend on both the daily and weekly charts with no signs of an imminent recovery anytime soon. This trend may continue till the index reaches 21,000 points after Li Ka Shing warned against speculating in the property market after Hong Kong banks announced a hike in interest rate.

Could this be the prelude to a rate hike in mortgage loan? While interest rates are not expected to spike up, there is every reason to believe that the cycle has started after years of being too low. This trend will be also confirmed if China starts to hike rates on fears of inflation and/or the US economy grows enough to warrant an exit from the stimulus measures. Similarly in Singapore, the increase in the SIBOR (Singapore interbank offer rate) has not increased for many years until recently when mortgage rates, too, rose a tad higher.

Shanghai Composite Index

A sudden buying spree ended with a whimper just before the official takeover by the new political leaders in March 2013. From November last year to February this year, the (Shanghai Stock Exchange) SSE rose from as low as 1,950 points to 2,450 points, chalking up an impressive gain of 500 points. Could it be a matter of too fast, too furious or is it a matter of facing up to disappointments on the policy front?

Like it or not, the Chinese stock market is still at an infancy stage whereby investors are still not as sophisticated as other markets. The Chinese stock market is still plagued by the herd mentality whereby everybody rushes into one group or a theme stock upon some comments by government officials. More often than not, investors are prone to speculating what the government officials would think or do without basing it on facts. This has led to a huge disappointment when the new leaders who took over in March failed to announce policies that are pro-economy or pro-stock market.

The unwinding process started in February after the SSE hit a high and the index has lost more than 200 points. Just like the HSI where a series of lower-low has been created, the SSE may head towards 2,150 points over the next one or two months after more policy curbs were introduced to cool the property market.

Straits Times Index

The Straits Times Index (STI) has been rather resilient in the face of corrections in the Shanghai and Hong Kong bourses and much of the strength can be found in the support provided by the DJIA. Should the US market start to show more weakness, we can be sure that the STI will break the psychological support of 3,300 points and head towards the primary support zone between 3,250 and 3,280.

While the index managed to cross 3,320 points, the conviction to power ahead was lacking and the entire market looked tired with buyers wary of a correction in the US market. A look at the mid-cap stocks such as Noble Group, NOL (Neptune Orient Lines), Olam International, COSCO Corporation or even some heavyweights such as CapitaLand and SembMarine do not instill much confidence.

No, it is not the end of the world if a correction comes along because an easing is long overdue. Investors will now be on the lookout for first quarter profits for signs of getting back into the market. Beware, as the profits may not be what investors will like!

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