Mar 25 Mid-Week Commentary: Bear market bounce or new young bull?

Thursday, 26 March 2009 11:53
WHAT IS DRIVING the market’s stunning rally? And is it another short-lived ‘dead cat bounce’?
Financials led this rally worldwide but it is now widespread across many sectors. In Singapore, since the start of March, DBS Group Holdings ($8.42) has surged 30%, United Overseas Bank ($10.32) 25% and Oversea-Chinese Banking Corporation (OCBC, $4.87) 19%. These gains pale in comparison with Keppel Land ($1.43) which rocketed 42.7% within the same period. Neptune Orient Lines shot up 31%, CapitaLand ($2.20) is 23.7% higher and City Developments ($5.01) rose 26% within the month. The FSSTI (1,691) on the other hand rose a more sedate 17%.

Since the start of the rally, the counter that has strengthened technically is Keppel Corp followed by Sembcorp Marine, the world’s two largest builders of jack-up rigs. Both stocks are above both their 50-day and 100-day moving averages. Keppel Corp’s quarterly momentum is poised to move into bullish territory and its smoothed annual momentum is in the process of turning up. Unlike the banks, neither made new lows this March, a sign that they had gained strength relative to the market. These could turn out to be early leaders.
Bank stocks made new lows in March, as did the property counters. This leaves them weaker technically than counters that didn’t make new lows. For instance, although Keppel Land rose spectacularly this week, it is meeting resistance at its 100-day moving average at $1.51 and that may be as far as it can go. CapitaLand has moved above both its 50-day moving average and is attempting to clear its 100-day moving average at $2.23. The 80 million volume in shares traded on Tuesday may have been the successful breakout needed. But it still has a distance to go before it attempts to challenge the key 200-day moving average currently at $3.05. The indicator is declining at the rate of one cent a day.
Dow Theorist George Schaefer has used the 200-day moving average as an indicator to differentiate bull markets from bear markets and so far, the local market has yet to make the grade.
On Tuesday, the FSSTI tested its 100-day moving at 1,700 and retreated. The clue to whether the market is about to start a new bull or just in a bear market rally should be out within the next three trading sessions. The FSSTI’s up-move created a small gap between 1,664 and 1,681. If that gap is not covered, it would turn out to be a breakaway gap — these are rarely covered, and mark the onset of new trend. However there has not been the crucial swing that will put the bear market once and for all behind us. There is a need for a sustained break above the strong resistance at 1,700 that would enable the FSSTI to test 1,800 successfully.
On Wednesday, the FSSTI closed slightly down at 1,691.68. Till that materializes, it would be premature to term the current moves as part of the new bull. Rather they are part of a bear market weakness that could eventually pass.
Some stocks have actually moved above their 200-day moving averages, but not in sufficient quantity to cause the broad market to strengthen. Wilmar International has moved above its moving average, and Olam International is challenging it.
Obviously, the Obama administration’s unveiling of more bailout details, better coordinated G-20 policies to turn around the financial crisis as well as the roll out of stimulus plans worldwide is giving the markets a firmer bottom. Meanwhile the market has probably done enough to put dead cat bounces behind it but stronger fundamentals are needed to sustain this rally.