Singapore Strategy - Re-jigging top picks

Usual caution towards September unwarranted? Since late August, there has been a growing perception that equities have become overbought. Various strategists have sounded caution. Warning shots like the sell-down of the Chinese stock market last week plus noises about a new interest rate tightening cycle have emerged as new negatives by early September. This, coupled with September’s infamous track record for stock-market disappointments, added to the caution. All the above concerns are valid, though they have to be balanced by the sense that there seems to be still a tremendous amount of un-invested money on the sidelines. Trading into the second week of September, high-yield stocks like SPH, M1 and the REITs have outperformed, indicating a chase for yields and still-high levels of liquidity. Market price actions make us reconsider our defensive posture: one might miss the next rally if one stays defensive for too long.

Maintain Overweight on Singapore; CY09 index target remains 2,700. We leave our 2,700 year-end FSSTI target unchanged for now though it is useful to start thinking about final index target peaks. From our study, the FSSTI peaked at 2.3- 2.4x P/BV in the last two recovery cycles. Simplistically extrapolating such P/BV peaks would imply FSSTI targets of 3,900-4,000 at the end of this bull cycle. This might be a tad too bullish as prospects for bank, property and O&M earnings were much stronger two years ago. The FSSTI peaked above 2.0x P/BV only in periods of extreme exuberance (2000 tech boom and 2007 property boom). Assuming it does not reach 2.3-2.4x P/BV and eventually peaks at 2.0x P/BV, we see a target of 3,350 for next year, when we would turn bearish. Using a mean 16x P/E would also suggest a FSSTI target of 3,400.

Sector thoughts and top picks. From our list of top picks in August, we would take profit on CDL-HT and Ho Bee, replacing them with PLife REIT and Keppel Land. Other picks such as CityDev, Indofood Agri, Noble, SembCorp Industries, SPH, Suntec REIT and UOB remain. Additionally, CSE Global and Ezra have been added to our preferred list. Among the sectors, we suggest going long on property and short on banks. We prefer interest-rate-sensitive sectors to banks. Conglomerates stand out as a non-consensus Overweight, though the brighter prospects in the sector belong to second-tier names for now, we believe.

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STI +2% over 2700

The continued optimism displayed by the US stocks overnight, coupled with a strong showing by the Nikkei in early morning trading is likely to inspire the STI to climb higher this morning.

We note that the last month's consolidation had resulted in the formation of a symmetrical triangle continuation pattern very similar to the one formed in early Jun'09 - mid Jul '09, which was subsequently followed by a strong bullish breakout to a new 2009 high of 2700. As such, any signs of a strong positive breakout in the days ahead could imply a similar outcome and propel the index towards the key support-turned-resistance level at 2740.

As before, we note that the technical indicators are starting to turn more positive, with the daily RSI rebounding strongly off the 50% mark and the daily MACD indicator on the verge of a bullish crossover.

On the upside, the immediate cap remains at 2681(50% retracement of 3906-1455 plunge), ahead of 2700 (psychological).

We continue to peg the initial support at around 2600 (mid Aug low); below this, the next strong support is at 2521 (mid Aug low).

Asia Indices

Nikkei 225 ? Hovering at key support (bearish)
SSEC ? Strong support found (bullish)
HSI ? More upside potential (bullish)
KLCI ? Heading higher in the coming week (bullish)
STI ? Still range bounded in the coming week (bearish)

Shanghai Stock Exchange Composite (SSEC) ? Strong support found

More upside in the coming week: SSEC could be heading higher in the coming week after staging a strong rebound off its 10-month uptrend line.

Indicators show signs of a turnaround:With the RSI showing signs of a strong rebound and the MACD histogram showing a bullish divergence to the price action, this could mean further upside momentum for the index in the coming week.

Hang Seng Index (HSI) ? More upside potential

Signs of rebounding at key support:With the index showing signs of rebounding strongly at the 6-month uptrend line on heavy volume, this could mean further upside potential in the days ahead.

Technical indicators more bullish now:With the RSI rebounding for the 2nd time at the 40% mark and the MACD indicator turning around positively at the center line last week, they seem to suggest more upside momentum ahead.

Straits Times Index (STI) ? Still range bounded in the coming week

No clear direction yet: The index could carry on to trade range bounded in the coming week between the 2521 and 2700 levels. Until a break out occurs at either levels, the medium term direction could still be unclear.

Technical indicators more bearish:With both the RSI and MACD indicators still trending down, these suggest that the momentum is still more downside biased.

STI - wait for the gap be filled

Straits Times Index, lets waiting the gap 2483 - 2503 to be filled

Watch For Break of Major Trendline in STI

In the above chart of the STI daily, we can see a very clear trendline that can be drawn from the beginning of the late March09/ early April09 rally.

This trendline is that it links all the major swing lows of the entire run up, including the recent pullback to the 2520 region. We can observe that there has not been a single trendline violation since the beginning of this run up.

The significance of this is that (1) it should act as interim support for the STI and (2) should this trend line be broken, it would turn into heavy upside resistance.

The high and low of the range is delineated by the week ending 7August09, when the STI sold off from the 2700 mark. Not including this week, the STI has been trading within the high/low range of the week ending 7August09 for the past 3 weeks.

The low (2542) and high (2700) of the range are the key support and resistance zones respectively. Typically, a consolidation range as such is a prime candidate for breakouts. Volatility in the market moves in cycles, and usually periods of low volatility (past 3 weeks) beget periods of high volatility.

In the chart above, we have delineated 2 scenarios for the STI. One for an upside breakout and another breakout to the downside. What we are looking for is for the STI to trade past key support (2542) or resistance (2700) and come back to test it again before pushing off.

For example, a break below key support at 2542 turns key support into key resistance. A second rejection of 2542 would usually be a high probability indication that the STI would be pushing lower. The reverse holds true should the STI trade to the upside beyond 2700 as well. In the interim, last week’s low, 2574, should hold up as shorter term support.

STI - sell into strength

Despite the slightly firmer opening, the STI soon succumbed to profit-taking pressure, which gradually grew over the morning. By the mid-day close, the benchmark index was off 1.2% at 2611.77, although off its intraday low of 2606.05.

Volume was little changed from last Friday's morning session with 1663m units traded, but losers overwhelmed gainers by over 2.5 to 1. Hence it was no surprise that only three of the FTST sub-indices were in the black.

On the technical front, the profit-taking was not unexpected ? the price action last Friday had formed a doji star, which suggested that the market looks pretty indecisive at the moment.
Investors were probably anticipating a dearth of newsflow with the end of the results season (for those companies who have their financial year end in Jun).

But intraday technical indicators are signaling a possible reversal in sentiment ? we may see more bargain hunting in the afternoon if Europe opens positively.

We peg the immediate support at 2601 (psychological and centre line of the Bollinger Band), ahead of 2521 (mid-Aug low and also the lower Bollinger Band). On the upside, the immediate cap is at 2681 (50% retracement of 3906-1455 plunge), ahead of 2700 (psychological).

We also suggested that S-chips and offshore & marine stocks would very likely rise and both sectors have seen sporadic interest. We expect that to continue into this week. However, index stocks have lost some of their momentum and market breadth is now lower than at prior peaks. Our preferred stance is to sell into strength for most index stocks.

US indices have very likely completed a wave 4 move and the DJIA and S&P 500 will very likely break out next week. However, we lower our upside target for the DJIA from 10,000-10,100 towards 9,800-9,900.

Possible STI Weakness Ahead, Driven by S&P 500

The STI is trading within the range of the week ending 7August09 (2700 and 2542). For there to be clear directional movement we will need to see a clean breakout in either direction. The S&P 500’s price action indicates that it might be in the midst of putting in a top. Should we see a weak CRB and a falling S&P 500, the STI should follow suit and decline as well.

Over the past 2 days, the S&P 500 has rejected the 1035 region twice. From the chart, we have 2 shooting stars in a row. Although the sessions closed flat for the day, the rejection of 1035 for 2 consecutive days indicates the inability to push higher in the short term.

The STI will have to contend with 2650 as resistance if we are to see a push to 2700. While the STI has been trading somewhat different from the S&P 500, we cannot ignore the potential topping formation that is present in a major index such as the S&P 500.

We would ideally like to see a divergence top in the STI as well via a push to 2700. This would give more confirmation that the STI might be correcting soon. However, with the potential top in the S&P 500, there is a possibility we might not see a STI top materialise.

For now, we will have to pay attention to the S&P 500 to see if it can confirm the divergence. A strong drop off in the S&P 500 should add pressure to the STI even though their correlation has not been very strong lately.

This also implies that 2700 is key resistance and 2542 key support.

STI strategy: sizeable correction may be due, if history repeats

MSCI Singapore fell 1.7% in August, similar to the MSCI Asia-Pacific ex-Japan Index fall. Average daily volume rose 20% MoM and 58% YoY to S$1,893m. Consumer staples was the best performing sector, up 6.5% MoM; telecoms the worst, down 8.5%. The market is trading at 18.4x/14.8x 2009/10E PE.

Actual Q2 real GDP growth was -3.5% YoY, better than the flash estimate of -3.7%. Consensus expected a downward revision following weak manufacturing production figures for June. Both private consumption and investment are still down 3.7% and 7.2% YoY, respectively, but less than the -4.2% and -15.1% in Q1, implying sharp seasonally adjusted increases on the quarter.

For Q209, 50% of stocks (by market cap) reported higher than expectations versus 10% below. Sectors that reported meaningfully higher- than-expected results were banks, offshore, media, healthcare, and commodities. Meanwhile, primary residential sales set a new record of 2,767 units in July.

The FSSTI has risen 80% from its trough in March. The speed and magnitude of the market collapse and the subsequent rally is reminiscent of the Asian Crisis. Between Sep 98 and Jan 99, the index rose 90% and gave back 35% of the gains over three weeks, before resuming the rally. This time, if history is repeated, giving up one-third of the gain would lower the FSSTI to 2,280. We remain positive on a 12-18M view. We believe policy tightening is unlikely, growth is not due for a double-dip, and valuations are not unduly dear. Incorporating EPS upgrades and rolling our target to end-2010, we see the FSSTI at 2,960 by end-2010.

STI now going to Elliott Wave 5

The chart of the STI above shows a wave count that conforms to the textbook definition of Elliott Wave. Right now, waves 1 through 4 have defined themselves clearly. Price action has unfolded in accordance to the Elliott Wave sequence.

Wave 1 was the initial run up from the 1455 base. Wave 2 was a directional countertrend move that corrected wave 1 starting from the 1950 region. Wave 3, which is typically the sharpest of the 5 waves, ran up to the 2424 level. Wave 4 was the messy sideways market we saw for about 2 and a half months from May09 to mid July09.

This puts us into wave 5, which is typically the last wave of the sequence. The run up of wave 5 has taken the STI up to the swing high of 2700 region where we saw the STI corrected from. We wrote in our weekly reports that the top at 2700 is too small to be a long term top. In other words, wave 5 is incomplete and unfolding. It thus stands to reason that the trend can still continue and there is a decent chance of another push to the upside before we should consider whether this entire rally has run out of steam. Possible targets are 2700 and 2744.

Perhaps the key point of this report is that the STI and Dollar Index are both in the terminal phases of textbook like Elliott Wave sequences. This allows us to forecast the STI from an individual stand point and also an inter-market one.

From an inter-market perspective, we know that a strong Dollar typically leads to a weak commodity market and in turn, this weighs down on equities. Should the Dollar bottom and the STI top occur around the same time, we might see the magnitude of the STI correction get magnified by the strong Dollar-weak CRB relation.

When wave 5 completes itself, trends usually undergo at least a sizeable correction. At this juncture, waves 1 to 4 have unfolded clearly in the Dollar & STI and this almost certainly puts us in the region of wave 5. (We will avoid sub-wave counts of wave 5 to avoid ‘staring at the tree and missing the forest’)

For the STI, there should be another leg to the upside as wave 5 unfolds. The STI price targets are 2700 and possibly 2744. To mark the start of the correction, what we are looking for is a broader scale topping formation such as a double top divergence spanning perhaps 2 months.

A top of this scale should be sufficient to precipitate a decent sized correction, especially if the Dollar begins to strengthen at the same time. Even more so if the STI top/ Dollar bottom occurs during September and October which are months where we typically see strong seasonal weakness in equities.

Straits Times Index (STI) - Reaching key supports already

Testing key supports: Despite correcting by >6% over the past 3 weeks, the index is now looking to test the 5.5-month uptrend line and the nearby key supports around the 2500 level.

Technical indicators still pointing south:While both the RSI and MACD indicators are still showing bearish signals, it is unlikely that the next 2424 support would be called into play.


At an important juncture: With the index retreating back to the 20,000 level last week, much remains to be seen whether the index will be able to sustain above this level.

Technical indicators still bearish:With the RSI falling below the 50% level and the MACD indicator still heading lower, the odds may favor the bears.

STI and trading ideas on ComfortDelgro and SBS Transit

Technically, the daily RSI seems to be turning back in the positive direction while the MACD continues to trend lower following its negative crossover in early Aug; these mixed signals suggesting that momentum in the near term could be turning for the better while medium term momentum still remains bearish.

The index is already nearing the firm supports; the first is the gap at 2485-2503 (formed over 23-24 Jul); the second is at 2425 (significant peaks in early Jun and also near the 50-day moving average and lower Bollinger Band). These are critical levels and the subsequent reaction of the index at these levels could provide more insights to the sustainability of the index's medium to long term recovery.

On the upside, the index would face immediate resistance at 2600 (psychological level) with the more important cap found at 2681 (50% retracement of the plunge from 3906 to 1455).

ComfortDelgro Corporation Ltd: Worth a Second Look ? ComfortDelgro goes ex-dividend on 25 August. Coupled with a technical buy, investors might consider taking a second look.

SBS Transit Ltd: Buy on Weakness ? SBS Transit goes ex-dividend on 25 August. Coupled with a technical buy, keen buyers might want to watch prices and buy on weakness.

12-month STI target of 2,991

Since 11 June, the market has risen a further 13% to an 11-month high of 323, driven in part by stronger than-expected 2Q results and, consequently, 6% upgrade in consensus estimates. This, in turn, was mainly due to better margins rather than top-line growth. While the market could take a breather in the near term, given the sharp bounce, this suggests that market earnings could see another leg-up as the top-line picks up – particularly during the sweet-spot before costs catch up with revenues.

With 2010E consensus earnings still down by 38% since March 2008 and at only 74% of the peak in 2007, there is probably further scope for consensus upgrades. In particular, we expect upgrades in the transport sector, where earnings are now 20% of 2007’s peak, to kick in.

Our 12-month STI target of 2,991 is based on a five-year average P/B (for 2010) and implies 16% potential upside. The corresponding MSCI Index target is 356, or +15%. Our P/B versus ROE analysis suggests that another 18% 2010E earnings upgrade over the next six to 12 months would bring the market back to the historical average P/B.

We maintain our overweight stance on transport, banks, media, financials and real estate. On the other hand, we remain underweight capital goods and telecom. Our top picks are SIA, UOB and SPH. Within the mid-caps, we like NOL, YZJ and Midas. Our least preferred stocks are COSCO, Sembcorp Marine and SMRT.

STI another 43 points to go for support

Straits Times Index=2,526 (another 43 points to cover the gap and reach yellowline support). At the moment, the 2542 low is acting as support. Beyond 2542, support is in the 2500 region, then the 2450 to 2424 region.

Immediate momentum is likely to have a bias to the downside, however, the trend still seems to be in tact at the moment and the possbility of another leg up towards 2700 is still in the cards.
Our view remains the same, namely, immediate momentum has a downside bias, but the uptrend is likely to still be in tact. We need to see how the STI reacts to the 2500 level should it clear 2542. What we are looking for is signs of an intra-day base in a region of heavy support.

STI still looking for a decline towards 2,480

Straits Times Index (towards yellowline). Straits Times Index (FSSTI) should face resistance near 2,680 and pullback towards at least 2,480. We still maintain that view. The index, which was extremely overbought then, corrected 158 points from a high of 2,700 to 2,542. A minor rebound has thus far brought the index up to 2,648. We see this as a counter-trend rally and expect another leg of decline. In our previous reports, we stated that a wave 5 up move was likely and labelled the breakout from the triangle as a wave 5. There are, however, alternative interpretations which we would highlight as the index unfolds. Meanwhile, we believe the index is due for another correction, which should bring it towards 2,480 (+/-1%).

STI Trend Still Intact Despite Short Term Weakness

The STI is continuing to decline from a rejection of the 2700 mark. The S&P 500, CRB and Dollar Index have simultaneously tagged their respective key support/resistance levels as well, resulting in a pullback across the board. Short term support for the STI is in the 2500 to 2515 region. There should be room for another leg upward once the STI digest this correction as the current trend is very unlikely to end due to 1 week of reversal.

The STI reacted to the 2700 mark over the past week and has since sold off sharply. The sharp sell off is likely to be due largely to inter-market relations as well. The Dollar Index tested key support at 77.68 to 77.45, the CRB, key resistance at 266 and the S&P 500, the 1007 to 1013 region as well.

The confluence of the major inter-market elements testing key support and resistance leves at the same time made the probability of a short-term reversal high. The STI’s sell off has been particularly sharp due to the sell off from a confluence of the 200 week moving average, the 2700 mark and the 50% retracement from (3907 to 1455) that we mentioned last week.

Key support is rather far away at the recent 2424 swing high, although the 2500 to 2515 region should provide interim support should the STI trade to that level. While the STI is correcting in the short-term, there are no clear signs of a top forming in the daily charts as of yet. Because of this, the overall trend is still long biased. There is still the possibility of another minor leg up to possibly test 2744 once the STI digests this correction.

Straits Times Index (STI) - Heading back towards the 2500 support

STI may have already corrected 5.6% over the last four down sessions, and it may be due for a technical rebound. But the daily MACD indicator has just initiated a negative crossover (though still high within the positive region); the daily RSI has since fallen out of the overbought region and could continue to ease towards the 50% mark.

We believe that the market may still be intent on testing the near-term support at 2520 (centre of the Bollinger Band) and seeing it hold before staging a stronger rebound; otherwise, the next stronger base for a rebound will come from the support around 2484 and 2503 (gap formed during 23 and 24 Jul).

On the topside, we think that the continued failure to clear 2681 (50% retracement of the plunge from 3906 to 1455) would leave the STI vulnerable to a large pullback, given the strong gains to date. The next potential reversion point is at 2751 (significant bottoms in Jan and Mar 08).

Failed to clear the 2700 key level: Technical rebound aside, the index is still seen locked in a correction mode after failing to clear the 2700 key resistance last week.

RSI falling out of overbought level:With the RSI just fallen out from the overbought level, it seems to suggest that the downside momentum is still intact.

MACD initiating a bearish crossover.The MACD indicator has exhibited a bearish crossover, suggesting that the correction could extend further in the coming week.

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.

STI retract to gap around 2500?

Straits Times Index=2,565 (Retracing towards the gap 2,483-2,503)

STI drops may fall further to cover gap

Straits Times Index=2,610 (fell below Greenline at 2,630, may fall to cover gap at 2,483-2,503)

STI at 3-year overbought levels

In our previous report, we stated that we were equally biased towards an upside or downside breakout from a triangle formation, but added that a break above 2,300 would bring the index towards 2,600. This is also in line with the view, expressed in our mid-year strategy report, indicating a minimum upside of 2,680. Thus far, the index has reached a high of 2,659.

We see limited near-term upside for the index and expect a pullback over the next two days. At the very least, the index should cover a gap at 2,485. Our expectations of an imminent peak and pullback is not primarily based on the presence of a gap, but wave patterns on highly correlated indices such as Hang Seng Index, Dow Jones Industrial Average (DJIA) and FTSE. The Straits Times Index (FSSTI) chart below shows an extremely overbought price oscillator index and that too from a weekly perspective. The index is also close to a 50% retracement level of 2,680 (the basis behind our initial target).

Similarly, the DJIA is extremely overbought and is close to an important Fibonacci resistance level. Near-term wave analysis suggests that the DJIA has completed a five wave rally from the July low of 8,087. The odds of a 50% retracement of the advance from that level are high.