Saturday, July 2, 2011

Market Analysis -- 2nd Jul 11


Technically, since May 2010 ( the period when the Greece's debt issue first worried the global markets and sent global markets on a correction mode ) till now, STI has been trading within a triangle formation despite another global markets sold down in March 2011 ( due to Japan natural disaster ) and June 2011 ( Greece's debt issue again ).  The formation of this triangle having an apex at around 3,120 could extend till probably October 2011.  More interestingly, another smaller triangle appears to be embedded inside this main triangle.  The embedded triangle starting from the time frame when global markets hit bottom in March 2011 is having the same lower boundary as that of the main triangle.  The embedded triangle is having an apex at around 3,100 level and could extend till September 2011.

After hitting a bottom on 17th June 2011, STI currently is on rebound mode and facing resistance at either 3,150 ( the upper boundary of the embedded triangle ) or 3,165 ( the upper boundary of the main triangle ).  Base on the triangle embedding triangle formation, if current rebound could lead to a breaking out, the condition to be fulfilled has to be breaking out of the main triangle ( at level 3,165 ) with huge volume.

Trading according to TA should observe the behavior of the STI at the upper boundary of the embedded and main triangles.  Traditionally, after breaking out of formation, a back test at the breakout point should occur to test that support level and if able to rebound from there, the breaking out should be much more confirm.  If either the upper boundary of the embedded or main triangle is unable to break, STI should pull back to test the lower boundary of the triangle.  These are the conditions TA traders/investors should observe and follow so as to minimize risk.

From the fundamental aspect, STI should be able to move up further after the existing worrying events ( that dent global economy ) are fully resolved.  The existing worrying events are :-

1. European debt issue ( Greece, Portugal, Ireland, Spain and Italy )
2. US economy recovery ( in particular unemployment rate )
3. Inflation issue in emerging countries ( monetary tightening measures to curb inflation lead to slower growth )

For the European debt issue, with Greek Parliament getting the vote for the austerity measures in order to get bailout funds from EU and IMF, this has calm the global markets a bit as any immediate default to Greece could lead to undesirable effect on global economy.  To be on the cautious side, investors should also continue to monitor the debt of Spain and Italy as those debts are even more "deadly" than those of Greece.

US economy recovery has not been smooth with unemployment rate being stubbornly high despite after 2 round of QE stimulus ( both did little to help bringing down the high unemployment rate ).  Economic data for past months have been mixed whereas corporate earnings so far has been fairly positive.  With US Fed has no indication of a possible QE3, investors are now focusing on US debt ceiling in August 2011 in which raising it would help the Government to spend more to jump start the sluggish economy again. 

Inflation issue in emerging countries in particular Asia has been a concern since last year when US Fed launched QE1 and QE2 when excessive liquidity flown into Asia to cause property and commodity prices rocketing.  To curb the inflation, Asian Governments have been doing interest rate hike, increasing bank reserve ratio or other tightening measures to curb rising property prices since last year.  As a result of that, economy growth has slowed down.  Investors are concern about whether with those tightening measures, Asian economy will it be a soft or hard landing.

Looking forwards to 2H2011, global economy might be able to perform better than 1H2011.  US debt ceiling should be able to raise without any doubt as this could be the only way to help lower down the unemployment rate through Government spending.  Inflation issue in Asian countries should be able to cooling off and under control.  Recent remark by China premier Wen Jiabao citing China is confident in controlling the inflation despite it is unlikely to meet the forecast of 4% for 2011.  Inflation in Asia should have peaked in 1H2011.  China inflation hit 5.5% while manufacturing activities just barely in the expansion mode has result in the extreme situation whereby the Chinese Government might consider loosen monetary tightening to help economic growth back on track and that no doubt is good news for Asia economy ( which indirectly could help US to better its economy recovery ).  As for the European debt, as long as Spain and Italy are able to contain their debt without another Greece's incident, the economy from Germany, England and France should be able to provide a good foundation for EU economy.  Another event could be further help cushion the global economy in 2H2011 is the recovery of Japan from the March natural disaster.  That natural disaster has hit hard on Japan economy and also affected global economy since Japan is world number 3 economy country.  Recent economic data has strongly shown that Japan recovery is better than expected and that no doubt is a piece of good news.  Without another QE3 from US will be another bright spot for Asian countries to fight against inflation.

July is the start of the earning season for 2Q2011 corporates.  2Q2011 corporates' earning should be hit by the Japan natural disaster and expected to be weaker than those of 1Q2011 or even 2Q2010.  The weaker result should not be a worry if Japan recovery is better than expected and Asia countries are to re-focus back to economic growth with inflation under control.  With that possibility in mind, stock prices might continue to advance playing the looking forwards factor despite the weaker earnings.

From financial cycle aspect ( recession to recovery to peak ), the performance of global stock markets this year ( taking away events like Japan natural disaster and European debts issue ) fit into the typical mid-bull cycle.  This mid-bull cycle which usually has stock markets consolidating in a range of +/-10% range merely reflect companies are going through the temporary stage of earning saturation after a sharp recovery from recession.  After this temporary stage, companies' earning will resume the performance stage thereby causing the final leg of the bull market.

As a whole, if without any unexpected events, global economies/stock markets should be able to perform better in 2H2011 and investors should take opportunities of accumulating if there is a pull back in the range of 5% to 10%.