STI index - Be Wary Of October

247,000 jobs were cut in the US in July, the smallest in months (June’s job loss was revised downwards to 443,000 from 467,000), and reason for yet another strong session on Friday, with benchmark indices up almost 2% (Hang Seng surged 2.7% in tandem yesterday). Dow however fell 32 points yesterday.

Another well-known “guru” has however advised caution: Mohd El-Erian, the co-CIO of Pimco, the world’s largest bond fund, reiterated that the US market is on “prolonged sugar high”.... Mark Mobius meanwhile expects global markets to drop as much as 30% “anytime, and probably this year”, after the sharp rebound.

China’s Pime Minister Wen Jiabao reiterated that the government’s mix of active fiscal policies (chief of which is the Rmb 4 trillion stimulus package) and appropriately relaxed monetary settings must stay in place because “we still face many hard-ships”, “international economic outlook remains unclear”, and pressure from falling external demand “remains heavy”. (It is perhaps good that bank lending slowed down significantly in July from June, after hitting a total of Rmb 7.37 trillion in the first 6 months, representing 25% of China’s GDP!)

Given that the 60th anniversary of the founding of communist China is 7 weeks away (Oct 1st), it does look like nothing should be “allowed” to “rock the boat”, as to trigger a big drop in the Shanghai market, as happened on July 29th when the index fell 5%. We believe this makes markets all the more vulnerable if the rally were to continue unabated in the coming weeks.

Technically, note that the STI is now 1.4x its upwards sloping 200-day moving average. In the last 20 years, this ratio has tended to peak at 1.2-1.4x, and bottomed at 0.6-0.8x. Exceptions were 1999, when the ratio hit 1.53x in May, and in October last year, the ratio went as low as 0.56x.

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