Investors continue to sell into strength

by R SIVANITHY (26 Nov)


SELLING into strength has been the preferred strategy over the past year and so it was again yesterday - the Straits Times Index first shot up 70 points in response to Monday's Wall Street rally but eventually closed just 32.96 points up at 1,653.25. It stood at 1,640 at 5pm but gained about 12 points in the post-closing adjustment period, mainly through a last-minute push on DBS and Keppel Corp.

The broad market was much more mixed than the index's reading would suggest - excluding foreign currency stocks, warrants and STI components, there were only 150 rises versus 148 falls.

Talk to dealers and the picture they would paint about the state of the local stock market remains the same as it has been for months now - stocks remain trapped within narrow bands with rallies viewed as bear traps and volume dwindling as a result.

Further afield there was worry that although the US government is bailing out Citigroup - news of which propelled Wall Street on Monday - there may be more large-scale failures yet to come in both the financial and motor industries.

As always, the local index's fortunes were dictated by Hong Kong, where the Hang Seng was firm throughout the day but was unable to add significantly to its 4 per cent gain that was attained early in the morning.

Among blue chips it was the banks which led the way, though all were off their highs. Similarly, SingTel rose 7 cents to $2.55 in the morning but finished one cent weaker at $2.47.

DMG Research said in a chart view on the STI that it believes a break below the 1,600-1,717 region implies the the index is headed for the 1,391 level by January. 'As for our weekly short-term view for the STI, we believe any rebounds should be short-lived. . .additionally, the 14-day RSI (relative strength index) still hovering above the 30 level also suggests that the STI is not yet oversold. Support is set at the 1,570-1,580 area. . .' said DMG.

In its Weekly Flow Investment Strategy Update dated Nov 20, Merrill Lynch said cash is king for now. 'But it's getting cheaper and cheaper: a typical US money market fund yields 0.73 per cent, meaning it would now take 95 years to double your money in it.'

It says it believes that among the catalysts cash-heavy investors are waiting for are lower volatility and spreads and the completion of big EPS downgrades. February is the earliest one can envisage all of them coinciding.

Meantime, investors were urged to watch credit spreads, for signs of credit-crunch easing, inventories for signs that the violent collapse in economic momentum is ending and A-shares, for signs that Chinese policy stimulus is working.

In its latest Economics & Strategy report dated Monday, Henderson Global Investors said that it is inherently difficult to call market bottoms but one signal is to look for the trend in leading economic indicators (LEIs).

'Plunging business and consumer confidence suggest the US, UK, Euro-zone and Japanese economies will experience a severe recession. . .the rapid deterioration in the economic outlook for Europe and the UK is likely to lead to more interest rate cuts in the coming months.'

Henderson also said recessions and periods of de-leveraging are almost always associated with falling inflation. However, the risk of headline deflation has increased substantially, said Henderson.

-Research Report by R SIVANITHY (26 Nov)