Peak or start of a major upleg? The 956pt week’s high could be the end of wave “a” which started when the S&P500 hit 667pts in early Mar. This is a gain of more than 43% in less than four months. A break below the crucial 927 support next week would confirm that 956 was a major peak for the S&P.
Bullish outlook also possible. However, the recent rally from 927 to 956 over the past few days could also be wave (i) of 5, which would mean more upside for the index in the next few weeks. Confirmation if S&P 500 breaks above 956 high.
Potential US$ rebound still valid. The Dollar Index’s rebound remains valid unless it goes below the early Jun 78.3 low. Last week, we highlighted the potential for a US$ rebound. The Dollar Index reached as high as 81.5pts early last week before pulling back and finding support at the trend line.
Great Wall cracking? The mighty China equity market showed signs of cracking towards the end of last week. The Shanghai Composite Index has been trading in an uptrend channel since Mar and the key support trend line for this week is 2,650-2,660. This support level must hold or a more meaningful correction might kick in the next few weeks.
Asian markets go sideways after hitting resistance. Since early Jun, after hitting the crucial 401pt 38.2% Fibonacci retracement (FR) of the 689-223 decline in 2007-08, the MSCI Asia ex-Japan (MAxJ) has been trading sideways. Its daily MACD and RSI technical indicators are showing strong negative divergence and probability favours consolidation ahead. The main support trend lines for the MAxJ are at 388 and 368pts. A break below 368pts would probably confirm a more meaningful consolidation ahead.
But bullish if MAxJ rallies. We would, however, turn bullish on Asia if the MAxJ took out its 405 Jun high in the coming weeks. This would indicate that the consolidation since early Jun has ended in a “flat formation” pattern.
ASEAN
Uptrend still relatively intact Stock markets ended the week mixed but with a positive bias, as economic indicators were still supportive of equities. Regional equities indices were up 1-4% with the exception of the FSSTI, which lost 0.8%. Value traded was on the weaker side compared to a week ago. US equities meanwhile closed the week up by no more than 1%.
Bull cycle evolution As the extended bottoming process equities gives way to what most cautiously perceive as a bull market, an examination of the evolution of the bull cycle valuations becomes more relevant. This is especially given that equities have been on a tear since March. Are things looking expensive relative to the previous experience, which we take as the 2003-2007 upcycle?
P/Es make quick gains The forward P/E valuations for all markets are bouncing off troughs from a higher starting point in this current cycle, and registering steeper gains as well. Within three months or so, the JCI has managed to claw its way back to mid-cycle P/E valuations. But the problem lies in the EPS projections – it has yet to catch up unlike its ASEAN peers. Its three ASEAN neighbours are still trading below mid-cycle P/Es, with better forecast 2010 EPS growth compared to the EPS CAGR throughout the full bull cycle of 2003-07.
P/BV more reasonable The P/BV looks a little less demanding, despite the pace of gains. As steep as the climb had been, all remain below their mid-cycle levels. The forward ROE trends look favourable for the KLCI and FSSTI, but flattish for the smaller JCI and SET markets. There is less of an urgency to see upgrades for the SET as its corresponding P/BV is still reasonable. However, the JCI again raises eyebrows, trading at closest to its mid-cycle P/BV when ROEs are still stubbornly stagnant. This is one market that needs some good news on the earnings front soon.
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