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Straits Times 3,126.14 -8.57 -0.27%
Hang Seng 26,848.49 +184.21 +0.69%
Dow Jones 27,042.26 +40.28 +0.15%
Shanghai Composite 2,977.33 -1.38 -0.05%
Oops! Wrong On Taper But… Right On Market Direction
Perspective | 30 December 2013
By: Ernest Lim
Articles (134) Profile

Asia markets, with the exception of China and Hong Kong, rose over the past two weeks. (See Table 1)

Japan led the gainers with a rise of 5 percent. The Shanghai index fell amid concern on the liquidity situation stemming from the resumption of initial public offerings (IPOs) next month and on slowing economic growth next year which may curb corporate profits.

Table 1: Indices’ Performance Over The Past Two Weeks

Source: Bloomberg, Ernest’s compilations

Technical Analysis Of Indices’ Charts

S&P500 Index

Two weeks ago, I mentioned that S&P500 seemed to have formed a minor double top formation. However, I also wrote that a solid and sustained close above 1,779 invalidates this minor double top formation. This was seen on the following day (i.e. 16 December) where S&P500 closed up 0.6 percent to 1,787. For more cautious investors who wanted to see whether there is a sustained close above 1,779, the price action on 18 December would have confirmed the invalidation where S&P500 closed up 1.7 percent to 1,811. (See Chart 1)

Based on the chart, the break above 1,810 points to a measured technical target level of around 1,845 which was reached on last Friday. This is also close to my personal S&P500 year-end price ceiling of 1,850 which I have said since mid-November. Hence at this point, on a technical basis, I am neutral on the S&P500.

Chart 1: S&P500 Broke 1,779 and 1,810. Near-term Target Around 1,845 – 1,850 

Hang Seng Index

As mentioned two weeks ago, I wrote that Hang Seng was unlikely to experience sharp falls with strong support 22,454–22,546. Over the past two weeks, Hang Seng was almost unchanged.

With reference to Chart 2 below, Hang Seng found support at the downward channel and rebounded. This is a good development despite the weakness in the Shanghai index. Support is raised to 22,584-22,750. It faces immediate resistance 23,273-23,405. Given the low ADX reading of around 16.9, it is likely that Hang Seng may trade in a range of around 22,715–24,120 in the near term. As Hang Seng is near the lower end of my mentioned range, it is likely that it may trend higher in the next two weeks closer to the upper range, especially with the low readings on MFI, RSI and MACD.

Chart 2: Hang Seng To Likely Trade The Upper Range Of 22,715 – 24,120

Straits Times Index

With reference to my previous bi-weekly market update, the STI indeed formed a low of around 3,025 on 12 December (near my worst case scenario level 3,025-3,030) and rebounded in line with my expectations. It closed at 3,150 on 27 December which was a rally of around 125 points from the intraday low of 3,025 on 12 December.

Based on the chart, the STI faces a cluster of resistances around 3,155–3,171 (historical resistances, 100-day and 200-day Exponential Moving Averages). A critical level to watch would be around 3,181–3,188. If the STI can breach the level 3,181–3,188 convincingly, the chart outlook for the STI would be more bullish.

Chart 3: STI – Rebounded From Support Level Of 3,025

Market Outlook

US Markets: Wrong On Taper, But Right On Market Direction

Oops! I am wrong on taper as the Fed started its taper in December. However, I am right on two fronts. Firstly, S&P500 surged after the Fed clarified its strategy on tapering. They elaborated that they are likely to take measured steps in tapering in the future meetings subject to data (i.e. data dependent and not on a fixed course). In addition, the Fed emphasised that tapering is not equivalent to raising interest rates and interest rates may continue to stay low well past the 6.5 percent unemployment threshold should inflation continues to stay low. With the above guidance, there is more certainty in the market on tapering. Secondly, my view on buy on dips and a year end rally is correct. However, based on my personal S&P500 year-end price ceiling of 1,850, which I have mentioned since mid-November, there may be little potential capital upside.

Going into 2014, most market strategists are sanguine on the US markets. Average consensus 2014 year-end target for the S&P500 is around 1,949 which represents a potential capital upside of around 5.8 percent.

Singapore Markets: Raising Equity Allocation To 90% During 2-13 December Paid Off

Two weeks ago, I mentioned that I have taken advantage of the selloff to raise my equity allocation from 40 percent to around 90 percent during 2-13 December. This opportunistic move pays off as the STI and the FTSE small cap index rose 4.1 percent and 2.5 percent respectively during 12-27 December.

Going into 2014, most market strategists are underweight Singapore market. However, my personal view is that there are selective stock opportunities in Singapore stock market in 2014. The key is in stock selection.

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

Current: 3,150

Support 1: 3,141

Support 2: 3,126 – 3,131

Support 3: 3,119

Support 4: 3,106

Resistance 1: 3,155 – 3,157

Resistance 2: 3,162

Resistance 3: 3,171

Resistance 4: 3,181 – 3,188

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

Summary Of Economic Calendar For The Week Ahead (SIN time)

30 Dec, Mon: (USD) Pending Home Sales m/m;

31 Dec, Tues: (USD) S&P/CS Composite-20 HPI y/y / CB Consumer Confidence;

1 Jan, Wed: (CNY) Manufacturing PMI;

2 Jan, Thurs: (CNY) HSBC Final Manufacturing PMI; (EUR) Spanish / Italian / Europe Manufacturing PMI; (GBP) Manufacturing PMI; (USD) Unemployment Claims / ISM Manufacturing PMI / Construction Spending m/m;

3 Jan, Fri: (CNY) HSBC Non Manufacturing PMI; (GBP) Construction PMI;

4 Jan, Sat: (USD) Crude Oil Inventories;

*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.

*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.

Hereby wishing you & your families a Happy 2014 ahead!

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.

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