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Global stock markets have had a huge rally since the first week of March 2009. It was liquidity driven and pre-emptive and after two months a new view that we are seeing a "V" shaped and not "U" shaped recovey is being factored in. Let's tackle these issues one at a time.....on the liquidity rally - I discussed yesterday that using technical indicators like the RSI - most stock markets and blue chips have crossed the 70 level and are thus very over-bought. This usually signals a 10% correction down to the previous resistance. The fact that markets like Singapore have started weak (such as yesterday) but closed up on selected buying of the three banks probably signals that there is still some unsatisfied demand by funds who missed the rally - who wont chase stock prices but would use weakness to accumulate. Once this is done, the over bought correction can continue....during this phase stock volumes of blue chips should start to decline.
The second phase is also important, ie that the rally was preemptive, ie in anticipation of an earnings recovery. Much would depend on the quarterly results of companies and their guidance. Let me give you an example...about one month ago - the forecasts for the Dow was for earnings to decline by 10% with forward PERs of 16 - that has changed in recent weeks both from weaker earnings to stronger share price performance to a prospective PER of 24 with earnings forecasted to fall by 30%. Our own STI is in the same boat - with a forward PER of 15 and earnings now forecasted to decline by 30% in 2009. But earnings forecasts are a moving target and we need to look at anecdotal evidence and thread carefully. Read more...[caption id="attachment_2469" align="alignright" width="150" caption="Photo by Balaji Dutt"][/caption]
Global stock markets have had a huge rally since the first week of March 2009. It was liquidity driven and pre-emptive and after two months a new view that we are seeing a "V" shaped and not "U" shaped recovey is being factored in. Let's tackle these issues one at a time.....on the liquidity rally - I discussed yesterday that using technical indicators like the RSI - most stock markets and blue chips have crossed the 70 level and are thus very over-bought. This usually signals a 10% correction down to the previous resistance. The fact that markets like Singapore have started weak (such as yesterday) but closed up on selected buying of the three banks probably signals that there is still some unsatisfied demand by funds who missed the rally - who wont chase stock prices but would use weakness to accumulate. Once this is done, the over bought correction can continue....during this phase stock volumes of blue chips should start to decline.
The second phase is also important, ie that the rally was preemptive, ie in anticipation of an earnings recovery. Much would depend on the quarterly results of companies and their guidance. Let me give you an example...about one month ago - the forecasts for the Dow was for earnings to decline by 10% with forward PERs of 16 - that has changed in recent weeks both from weaker earnings to stronger share price performance to a prospective PER of 24 with earnings forecasted to fall by 30%. Our own STI is in the same boat - with a forward PER of 15 and earnings now forecasted to decline by 30% in 2009. But earnings forecasts are a moving target and we need to look at anecdotal evidence and thread carefully. Read more...
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Global stock markets have had a huge rally since the first week of March 2009. It was liquidity driven and pre-emptive and after two months a new view that we are seeing a "V" shaped and not "U" shaped recovey is being factored in. Let's tackle these issues one at a time.....on the liquidity rally - I discussed yesterday that using technical indicators like the RSI - most stock markets and blue chips have crossed the 70 level and are thus very over-bought. This usually signals a 10% correction down to the previous resistance. The fact that markets like Singapore have started weak (such as yesterday) but closed up on selected buying of the three banks probably signals that there is still some unsatisfied demand by funds who missed the rally - who wont chase stock prices but would use weakness to accumulate. Once this is done, the over bought correction can continue....during this phase stock volumes of blue chips should start to decline.
The second phase is also important, ie that the rally was preemptive, ie in anticipation of an earnings recovery. Much would depend on the quarterly results of companies and their guidance. Let me give you an example...about one month ago - the forecasts for the Dow was for earnings to decline by 10% with forward PERs of 16 - that has changed in recent weeks both from weaker earnings to stronger share price performance to a prospective PER of 24 with earnings forecasted to fall by 30%. Our own STI is in the same boat - with a forward PER of 15 and earnings now forecasted to decline by 30% in 2009. But earnings forecasts are a moving target and we need to look at anecdotal evidence and thread carefully. Read more...
