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US Budget Impasse – Accumulation Opportunities For The Brave-Hearted?
Perspective | 07 October 2013
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By: Ernest Lim
Articles (134) Profile

The US budget impasse, coupled with concerns over whether the US government will default on its debt exerted downward pressure on Asian stocks. With reference to Table 1 below, the Nikkei 225 and Straits Times Index (STI) led the declines with 4.9 percent and 3.1 percent drops respectively.

Table 1: Indices’ Performances Over The Past Two Weeks

Source: Bloomberg; Ernest’s compilations

With reference to Chart 1 below, given the low average directional index (ADX) of 14.6, the S&P 500 Index (S&P500) is likely to remain range-bound between 1,654 to 1,730. The key supports and resistances are at 1,677 / 1,663 / 1,654 and 1,704 / 1,709 / 1,730 respectively. Barring a debt default which is likely a low probability event by most analysts, it is unlikely to breach convincingly below 1,730.

Chart 1: S&P500 Continues To Range Bound 1,654 – 1,730

Source: CIMB itrade Complimentary Chart (As At 4 October 2013)

Two weeks ago, I mentioned that the Hang Seng Index’s relative strength index (RSI) was 72 on 19 September vis-à-vis the recent high of 79 on 25 October 2012. In addition, since 28 August to 20 September, Hang Seng had surged 1,978 points, or 9.2 percent in 16 trading sessions. As a result, I wrote that it is likely that Hang Seng may consolidate first after such gains.

Since 20 September, Hang Seng fell 1.5 percent to close at 23,139. With reference to Chart 2, Hang Seng continues to be one of the relatively stronger charts buoyed in part by the resilience in China’s stock market. However, with its low ADX of 17.1, it is likely to be range-trading in the next one to two weeks. Significant supports can be seen at 22,935, 22,700 and 22,580 while resistances are at 23,455 to 23,550, 23,640 and 23,945.

Chart 2: Hang Seng – Likely To Range Trade

Source: CIMB itrade Complimentary Chart (As At 4 October 2013)

Two weeks ago, I wrote that the STI was likely to consolidate its gains after jumping 233 points from 28 August to 20 September. Since 19 September, the STI has fallen 9 out of 12 trading sessions. It has almost retraced about 50 percent from the rally from 28 August to 20 September. The RSI was at 45.4 last Friday. The STI remains one of the weakest charts versus S&P500 and Hang Seng. Key supports are around 3,119 to 3,126 and 3,094. Resistances are at 3,157 to 3,167 and 3,184 to 3,187. (See Chart 3 below)

Chart 3: STI – One Of The Weakest Charts

Source: CIMB itrade Complimentary Chart (As At 4 October 2013)

Summary
As mentioned two weeks ago, the US budget deal and the decision on the US debt ceiling are likely to add uncertainty to the market. This is likely to continue in the next two weeks. However, the market consensus is that the US is likely to scrap through this with a deal at the eleventh hour, that is to say the US default is currently a low probability event.

In addition, for our Singapore market, it is noteworthy that the recent meltdown of stocks such as Blumont Group, Asiasons Capital, LionGold Corporation, ISR Capital, Innopac Holdings, ISDN Holdings is likely to cast some negative sentiment on stocks, especially small to mid cap stocks. Notwithstanding this, I reiterate my constructive stance on equities with a horizon of a year and my personal strategy remains to accumulate certain stocks on weakness from 20 September to October or November. I may raise my equity position to 80 to 90 percent if opportunities arise.

As mentioned two weeks ago, clients can consider to use contract for difference (CFD) to accumulate blue chip counters tactically. (P.S: Do be aware that CFDs are leveraged instruments and you may lose more than your capital put in. Let me know if you have queries on CFDs.)

Do note that everybody is different in terms of returns expectations, risk profile, portfolio size, commitments, market outlook, stock preference etc. I am only giving myself as an example. [Another important point is that, due to the nature of my work, I can raise or decrease my allocation rapidly.]

Below is the chart review of Sino Grandness Food Industry Group which I have mentioned two weeks ago.

Chart Review: Sino Grandness

1. Sino Grandness post split basis – 20 September close: $0.635. 4 October close: $0.685. Intraday high on 3 October: $0.725

Two weeks ago, I mentioned that Sino Grandness seemed to have broken the downtrend line established since late July with strengthening indicators such as RSI and MACD (moving average convergence/divergence). It managed to clear the mentioned confluence of resistances around $0.645 to $0.660 (post split basis) with volume expansion which is a bullish development. Indicators are generally healthy. ADX has started to strengthen amid positively placed DIs (directional indicators) which is indicative of the start of a trend. On balance volume (OBV) is near all-time high. Based on Chart 4 below, it seems likely that Sino Grandness may head towards its record high of around $0.780 to $0.80 in the next three months.

Chart 4: Sino Grandness Chart Positive After Breaching Resistance

Source: Metastock Chart (As At 4 October 2013)

It is noteworthy that the above mentioned stocks are small cap stocks and they are likely to be more volatile than blue chips. In other words, they may drop more than the market if the market weakens.

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 or sell and what to buy or 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: 3,138

Support 1: 3,126

Support 2: 3,119

Support 3: 3,094

Support 4: 3,084

Resistance 1: 3,157

Resistance 2: 3,167

Resistance 3: 3,184 to 3,187

Resistance 4: 3,197

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

Summary of Economic Calendar for the Week ahead (Singapore time)

7 October Monday: (EUR) Final GDP quarter-on-quarter;

8 October, Tuesday: (EUR) German Factory Orders month-on-month;

9 October, Wednesday: (JPY) Monetary Policy Meeting Minutes; (GBP) Manufacturing & Industrial Production; (EUR) German Industrial Production month-on-month; (USD) FOMC Member Evans Speaks / Crude Oil Inventories / FOMC Meeting Minutes;

10 October, Thursday: (JPY) Core Machinery Orders month-on-month; (CNY) **M2 Money Supply year-on-year & New Loans; (EUR) ECB President Draghi Speaks; (GBP) Official Bank Rate; (USD) Unemployment Claims / FOMC Member Bullard Speaks / FOMC Member Tarullo Speaks;

11 October, Friday: (USD) Prelim UoM Consumer Sentiment; (ALL) IMF Meeting Day 1;

12 October, Saturday: (CNY) Trade Balance; (ALL) IMF Meeting Day 2;

13 October, Sunday: (ALL) IMF Meeting Day 3;

*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.

**(CNY) M2 Money Supply y/y & New Loans are tentatively scheduled between 10 to 15 October.

Please refer to Forex Factory Calendar for a more detailed / up to date list of economic events.

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

All the best for your investment and trading!

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.

Sino Grandness Food Industry Group  0.044 -0.001 -2.22%   
Business: Integrated manufacturer & distributor of own-branded Garden Fresh juices as well as canned fruits & vegetables. [FY17 Turnover] Beverage (72.4%), canned pdts (27.6%).

Insight: Aug-18, 1H18 revenue jumped 10.6% to Rmb1.7b mainl... Read More
Blumont Group  -- -- --   
Business: Co provides contract sterilization and polymerization services. [FY18 Turnover] Sterilisation (99.3%), property (0.7%).

Insight: Feb-19, FY18 revenue increased 6%. Total expenses ... Read More
LionGold Corp  -- -- --   
Business: Co has interests in gold mining and exploration companies in Australia and Ghana.

Insight: May-19, FY19 revenue rose 18.6% due to increased t... Read More
Reenova Investment Hldgs  -- -- --   
Business: Co provides consultancy services and invests in both listed and unlisted companies and projects.

Insight: May-19, 1Q19, Co did not record any revenue for th... Read More
Innopac Hldgs  -- -- --   
Business: Co principally engages in investments of marketable securities, financial instruments and investment properties.

Insight: May-19, 9M19 revenue slid 56.3% due to decreased r... Read More
ISDN Hldgs  0.210 -0.005 -2.33%   
Business: Mechatronics engineering group providing solutions to its motion control and industrial computing customers. [FY18 Turnover] Motion control (78.2%), engineering solutions (19.6%), industrial computing & others (2.2%).

Insight: May-19, 1Q19 revenue dipped 0.9% reflecting modera... Read More


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