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Markets – Limited Potential Upside In The Near Term
Perspective | 17 June 2014
By: Ernest Lim
Articles (134) Profile

Based on Table 1 below, Asian indices continued to gain on the back of strong U.S. indices and better-than-expected data from China on retail sales and lending.

Table 1: Indices’ performance over the past two weeks

Technical Analysis Of Indices’ Charts
S&P500 Index

As mentioned two weeks ago, S&P500’s trend remained up and the breakout from the trading range 1,831 – 1,891 on 23 May pointed to a measured technical target of around 1,951.

This was spot on. S&P500 touched an intraday high of 1,956 on 9 June before closing at 1,951 on that day. It closed at 1,951 again on 10 June and subsequently fell. (See Chart 1 below).

RSI has dipped from 73.7 on 9 June to 61.4 on 13 June. S&P500 has already reached my near term technical target.

A dragonfly doji seemed to have formed on 10 June, which typically marks a potential change in trend. The drop in the next two days ( 11 & 12 June) seemed to corroborate the formation.

However, in order to confirm a trend has changed, (based on the available chart information now), S&P500 should drop below the uptrend line formed since November 2012.

Near term supports are at 1,921 – 1,922 / 1,897 – 1,902 / 1,886 -1,892. Resistances are at 1,950 – 1,951 / 1,975 / 2,000.

Chart 1: S&P500 – Uptrend Since Nov 2012 Remains Intact

Hang Seng Index
Two weeks ago, I wrote that in the next 2-4 weeks, there was a >50 percent possibility that Hang Seng may breach its prior high of 23,225 on 10 April 2014.

This was spot on as Hang Seng broke the 23,225 on 3 Jun and closed at 23,319 last Friday.

Hang Seng’s chart continued to look positive amid the strengthening ADX (ADX closed at 28.7 on last Friday) and golden crosses formed by the exponential moving averages.

RSI closed at 62.5 on last Friday. (See Chart 2 below)

Near term supports and resistances are at 23,003 / 22,747 / 22,552 – 22,639 and 23,428 – 23,469 / 23,555 / 23,705 respectively.

Chart 2: Hang Seng’s Chart Continued To Look Positive

Straits Times Index
Two weeks ago, I mentioned that the trend for STI remained up and odds (say slightly >50 percent) are likely of reaching the eventual upside measured technical target of 3,348.

For the past two weeks, STI traded within the range of 3,272 – 3,311, which coincided with my previously mentioned supports 3,265 – 3,270 and resistance at 3,310.

However, indicators such as RSI, MACD and MFI are showing bearish divergences which in my opinion, are red flags.

Although the bearish divergences are not confirmed sell signals, they indicate a market whose strength seems to be waning.

Coupled with the tapering / slightly declining ADX (ADX dipped from 22.0 on 9 Jun to 21.1 on 13 Jun), it adds to the evidence that STI’s upwards momentum seems to be waning. (See Chart 3 below)

See STI supports and resistances below.

Chart 3: Indicators Such As RSI, MACD And MFI Showed Bearish Divergences

U.S. Market outlook – What Are The Catalysts For The Market To Continue To Push Higher Without Some Form Of Consolidation?
As mentioned above, S&P500 has reached my measured technical target of 1,951 with potential upside capped at around 1950-1975 in the near term.

Although S&P500 may move higher than 1,975 or 2,000 in the longer term, I would be cautious in the near term as one has to wonder what are the catalysts for the market to continue to push higher without some form of consolidation?

Singapore Market Outlook – Cautious In The Near Term
As per my bi weekly market update sent out on 1 June, Sunday, I mentioned that I am cautious on the general markets (STI, S&P500) as they lack catalysts for a substantial upmove in the near term without some form of consolidation.

Near term potential upside may be capped at around 1950-1975. Hence potential appreciation may be capped in the region of 1-3 percent in the short term.

Since 1 June, I noticed the following in our Singapore markets

1. Market volume has been getting lower and quieter. This may be due in part to the upcoming World Cup, or some fund managers, or market participants who are on vacation.

2. Our market seems to be getting numb to the rising U.S. market. However, I wonder whether our market will be numb, if U.S. market weakens.

3. The rise in the following stocks Blumont, Asiasons, Liongold, Innopac and other micro caps may signify that the market is near the tail end of the rally, or at the very least, it may signify a pause in the market rally.

4. Even defensive stocks such as REITs have generally started to weaken.

In addition, the Chicago Board Options Exchange SPX Volatility Index (i.e. “VIX” or “fear” index) closed at 10.7 on 6 June, which was near to the level last seen in Feb 2007. (VIX reached an all time low in 1993 at around 9.3. VIX exceeded 80 in Mar 2009).

In my opinion, this is something that we have to bear in mind as there seems to be a certain level of complacency in the market.

In view of the above, I have reduced my equity allocation from 100 percent on 1 June to about 8 percent on 11 June by taking profit on most stocks and cutting loss on one stock.

Subsequently, I have raised my equity allocation from 8 percent on 11 June to approximately 30 percent as of last Friday on some trading plays.

(Clients have and will be notified if there are any interesting stocks to look at.) I am likely to maintain an equity allocation between 20-40 percent in this near term unless there are compelling reasons to buy or sell in a big way.

What if I am wrong?

If I am wrong, I have protected my downside. In addition, I believe I should be able to react and capture some potential upside if I am indeed wrong.

To be clear, over the long term (say 1 year), I am positive on the equity market. However, in the short term (say 1 month), I am pretty cautious.

Please note that I am putting my equity allocation and selected stocks above just for discussion purpose. Due to my work nature, I can change my equity allocation and the stocks quickly. Everybody is different in terms of returns expectations, risk profile, portfolio size, commitments, market outlook, stock preference etc. As such, everybody’s allocation in equities differs.

In addition, it is noteworthy 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 Near Term Supports And Resistances Are:
Current: 3,293

Support 1: 3,282

Support 2: 3,270

Support 3: 3,249 – 3,251

Support 4: 3,222

Resistance 1: 3,309 – 3,311

Resistance 2: 3,317 -3,320

Resistance 3: 3,337

Resistance 4: 3,345 – 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)
16 Jun, Mon (USD) Empire State Manufacturing Index / Industrial Production m/m / NAHB Housing Market Index;

17 Jun, Tues: (EUR) German ZEW Economic Sentiment; (USD) Building Permits / Core CPI m/m / Housing Starts;

18 Jun, Wed: (JPY) Monetary Policy Meeting Minutes; (GBP) MPC Asset Purchase Facility Votes / MPC Official Bank Rate Votes; (USD) FOMC Economic Projections / FOMC Statement / FOMC Press Conference;

19 Jun, Thurs: (GBP) Retail Sales m/m; (EUR) Eurogroup Meetings; (USD) Unemployment Claims / Philly Fed Manufacturing Index;

20 Jun, Fri: (JPY) BOJ Gov Kuroda Speaks;

*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.

All the best for your investment and trading!

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

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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