The Stock Market Dilemma: Smells Like A Bear But Is It A Bear?
By Gabriel Gan
The fortnight that just ended was mixed for investors who invested in different categories of stocks: the blue chips, the mid caps and the small caps.
Although the Straits Times Index (STI) ended the fortnight relatively unchanged, some investors can be forgiven for thinking that the bear is back. While the STI held relatively firm in the face of uncertainties from China, Europe and US, the mid caps – especially some commodity stocks and other cyclicals – fell quite sharply and the same could be said for the small caps.
How do we explain this phenomenon where blue chips held on while the rest of the market tanked?
Since the STI peaked at 3,313 points in November 2010, the index had only once gone close to 3,300 points (STI traded at 3,280 points in January 2011) and has never looked back. As a matter of fact, we can say that we have been in a minor “bear market” for more than six months from November 2010 till now because the STI was in a firm downtrend that seemed to have ended in March 2011 when the Japanese earthquake and tsunami dragged the STI down to 2,919 points.
From a high of 3,313 points to 2,919 points, a 400-point loss, or a 12% drop, clearly defines the index as being in a “bear market”. After the March selloff, regarded by some as a final capitulation, global stock markets rallied and the STI rose back to a high of 3,208 points within a month.
Perhaps, the rise was too fast and investors are now looking back and wondering if the stock market has run too far ahead of fundamentals. A lot of investors, after facing one crisis after another, have taken a shortened view of the stock market – owing also partly to the growth of a new breed of traders and hedge funds who create short-term volatilities in the stock market and try to make a profit from very narrow spreads.
With not much of a direction and volume in the stock market, traders and hedge funds have turned to mid- and small-caps while blue chips continue trading in a narrow range.
More Signs Of Slowdown
The second-half of the week kicked off with more news that strengthened the conviction of investors who believe that the bear is back.
China’s purchasing manager’s index, while still showing expansion, grew at the slowest pace in nine months amidst an inflationary environment that is already well-discussed and well-documented. A softening European Union – the largest trading partner of China – and a US economy that has lost steam, may not augur well for China’s manufacturing sector especially when wage pressures and other inflationary evils threaten China’s position as a cheap production base.
If inflation does not come down while its economy slows, it is hard to find a catalyst for the Shanghai Composite Index to rise now that it is trading below 2,700 points and look set to test the support at 2,661 points followed by the 2,570-2,600 support zone.
Similarly in Europe, the manufacturing index slipped to 54.6 in May from 58 a month ago, signaling more trouble for the EU that already has to rescue Greece and, possibly, even Italy from further financial woes. The belt-tightening measures have started to weigh on the economy while higher energy and good costs, too, hit the wallets of consumers. In UK, global challenges dragged down by factory orders to its lowest since September 2009 – a sign that global economic growth has indeed lost its momentum after rising in 2010 on more stimulus measures.
China, which used to be the pillar of strength for the world, now faces problems of its own and looks unlikely to be spared from a global correction should economic growth slow in the next few months while the US will have its QE II expire by the end of this month.
Can the Fed stimulate the economy by having a QE III? It is hard for the US government to raise the debt ceiling and get the Congress to rubber stamp another deal of such a nature. However, what the Fed can now do is continue to keep interest rates low and hope for energy prices to come down so that energy costs do not eat into the spending power of consumers.
We must be watchful of economic data in the next few months, as a six-month-old correction may drag into a longer one if the situation does not improve rapidly. Still, the stock market has become unfathomable with high oil prices suddenly becoming something of a bane when previously, high oil prices were seen as a sign of strong global demand.
If oil prices were to fall, that would probably bring down inflation but will the market view it as a sign that demand is tapering off? It all depends on sentiment – a single-most important factor in deciding how the market views both good and bad news. There are always two sides to the same coin.
Beginning To Look Like A Bear?
With commodity prices and commodity-related stocks falling amid weak demand, it sure looks like the commodity rally is over. From the outset, has the commodity rally been due to strong demand or has it been the result of a weak dollar?
A weakening dollar arising from the loose monetary policy in the US has led investors into pushing up gold and other commodity prices. Slowing demand has now led to a sharp decline in commodity prices and the same reason has caused most stock prices to come down over the past few months.
While the STI managed to hang on to the 3,150-support despite a 279-point fall in the Dow Jones Industrial Average (DJIA), the support here looks weak and may not hold if the weekly jobless claim and the monthly unemployment figures disappoint. For the third time, the STI bounced off the support at 3,100 points and it may happen again unless this level gets taken out easily.
Hopefully, the support zone at 3,080-3,100 can hold or we may see STI fall to 2,950-3,000 points.
The DJIA may find some reason to look for a support at 12,000 points, as it is a psychological support as well as a level supported by the uptrend line from the rally that started in July last year. Although fundamentals look nothing short of being horrible, we can find comfort in the fact that trading has been very volatile of late and all sorts of good and bad news can drive the market in either direction without much of a warning.
A six-month correction coupled with bad sessions before and after the Chinese New Year have sidelined investors while the Japan earthquake simply made fearful investors even more afraid to come in after missing out on the March/April rally. It will take quite a lot for the stock market to regain confidence, especially after bouts of corrections.
It does look like a bear, but profits can be made whenever fear factor is at a high.
Source/转贴/Extract/: www.sharesinv.com
Publish date:03/06/11
By Gabriel Gan
The fortnight that just ended was mixed for investors who invested in different categories of stocks: the blue chips, the mid caps and the small caps.
Although the Straits Times Index (STI) ended the fortnight relatively unchanged, some investors can be forgiven for thinking that the bear is back. While the STI held relatively firm in the face of uncertainties from China, Europe and US, the mid caps – especially some commodity stocks and other cyclicals – fell quite sharply and the same could be said for the small caps.
How do we explain this phenomenon where blue chips held on while the rest of the market tanked?
Since the STI peaked at 3,313 points in November 2010, the index had only once gone close to 3,300 points (STI traded at 3,280 points in January 2011) and has never looked back. As a matter of fact, we can say that we have been in a minor “bear market” for more than six months from November 2010 till now because the STI was in a firm downtrend that seemed to have ended in March 2011 when the Japanese earthquake and tsunami dragged the STI down to 2,919 points.
From a high of 3,313 points to 2,919 points, a 400-point loss, or a 12% drop, clearly defines the index as being in a “bear market”. After the March selloff, regarded by some as a final capitulation, global stock markets rallied and the STI rose back to a high of 3,208 points within a month.
Perhaps, the rise was too fast and investors are now looking back and wondering if the stock market has run too far ahead of fundamentals. A lot of investors, after facing one crisis after another, have taken a shortened view of the stock market – owing also partly to the growth of a new breed of traders and hedge funds who create short-term volatilities in the stock market and try to make a profit from very narrow spreads.
With not much of a direction and volume in the stock market, traders and hedge funds have turned to mid- and small-caps while blue chips continue trading in a narrow range.
More Signs Of Slowdown
The second-half of the week kicked off with more news that strengthened the conviction of investors who believe that the bear is back.
China’s purchasing manager’s index, while still showing expansion, grew at the slowest pace in nine months amidst an inflationary environment that is already well-discussed and well-documented. A softening European Union – the largest trading partner of China – and a US economy that has lost steam, may not augur well for China’s manufacturing sector especially when wage pressures and other inflationary evils threaten China’s position as a cheap production base.
If inflation does not come down while its economy slows, it is hard to find a catalyst for the Shanghai Composite Index to rise now that it is trading below 2,700 points and look set to test the support at 2,661 points followed by the 2,570-2,600 support zone.
Similarly in Europe, the manufacturing index slipped to 54.6 in May from 58 a month ago, signaling more trouble for the EU that already has to rescue Greece and, possibly, even Italy from further financial woes. The belt-tightening measures have started to weigh on the economy while higher energy and good costs, too, hit the wallets of consumers. In UK, global challenges dragged down by factory orders to its lowest since September 2009 – a sign that global economic growth has indeed lost its momentum after rising in 2010 on more stimulus measures.
China, which used to be the pillar of strength for the world, now faces problems of its own and looks unlikely to be spared from a global correction should economic growth slow in the next few months while the US will have its QE II expire by the end of this month.
Can the Fed stimulate the economy by having a QE III? It is hard for the US government to raise the debt ceiling and get the Congress to rubber stamp another deal of such a nature. However, what the Fed can now do is continue to keep interest rates low and hope for energy prices to come down so that energy costs do not eat into the spending power of consumers.
We must be watchful of economic data in the next few months, as a six-month-old correction may drag into a longer one if the situation does not improve rapidly. Still, the stock market has become unfathomable with high oil prices suddenly becoming something of a bane when previously, high oil prices were seen as a sign of strong global demand.
If oil prices were to fall, that would probably bring down inflation but will the market view it as a sign that demand is tapering off? It all depends on sentiment – a single-most important factor in deciding how the market views both good and bad news. There are always two sides to the same coin.
Beginning To Look Like A Bear?
With commodity prices and commodity-related stocks falling amid weak demand, it sure looks like the commodity rally is over. From the outset, has the commodity rally been due to strong demand or has it been the result of a weak dollar?
A weakening dollar arising from the loose monetary policy in the US has led investors into pushing up gold and other commodity prices. Slowing demand has now led to a sharp decline in commodity prices and the same reason has caused most stock prices to come down over the past few months.
While the STI managed to hang on to the 3,150-support despite a 279-point fall in the Dow Jones Industrial Average (DJIA), the support here looks weak and may not hold if the weekly jobless claim and the monthly unemployment figures disappoint. For the third time, the STI bounced off the support at 3,100 points and it may happen again unless this level gets taken out easily.
Hopefully, the support zone at 3,080-3,100 can hold or we may see STI fall to 2,950-3,000 points.
The DJIA may find some reason to look for a support at 12,000 points, as it is a psychological support as well as a level supported by the uptrend line from the rally that started in July last year. Although fundamentals look nothing short of being horrible, we can find comfort in the fact that trading has been very volatile of late and all sorts of good and bad news can drive the market in either direction without much of a warning.
A six-month correction coupled with bad sessions before and after the Chinese New Year have sidelined investors while the Japan earthquake simply made fearful investors even more afraid to come in after missing out on the March/April rally. It will take quite a lot for the stock market to regain confidence, especially after bouts of corrections.
It does look like a bear, but profits can be made whenever fear factor is at a high.
Source/转贴/Extract/: www.sharesinv.com
Publish date:03/06/11
No comments:
Post a Comment