Tuesday, September 14, 2004
Market Update
Rally Has Legs
So far the rally in the equity markets have been going on just fine. Take the STI for instance, which I believe has made a new high for the move, the choppiness in recent weeks notwithstanding. Of course, we always turn to the US markets for direction, and thus far what I'm seeing is very positive. I believe that the rally in the US markets has legs, and there is further upside in the days and perhaps even weeks ahead.
While short term technical indicators are still in overbought territory, this does not mean that the rally cannot continue. Indeed, intermediate term indicators are still doing well and point to at least a couple of weeks more of rising prices, even though a short term consolidation or pullback may be in order. The price action of the S&P on rebound off the pivotal 1060 low has been quite remarkable. Not only has the S&P consistently held above the 200-day moving average since the moment of its breach a few trading days ago, but every time in the past three weeks that the S&P turned its daily chart down, a strong rebound followed. This is undeniably bullish action.
If this bullish action continues, especially after the close of the S&P above the extremely important 1123 level on Friday, I expect that short sellers will be squeezed and a move towards 1040 is in order. As such I strongly recommend AGAINST shorting strength during this period, but instead holding on to long positions with stops at the 1114-1116 level.
Turning to the fundamental picture, the trade deficit has narrowed slightly but still remains above 5% GDP. On a historical basis, such a wide trade deficit endured by any nation has always been unsustainable and has always led to a currency correction. I do not expect to US to be any different in this regard, and I do not believe the old jibe that "this time it's different". The inevitability of global rebalancing and the swings of the business cycle will always be a fact that we have to contend with.
What has happened is that to keep up its capital and business expenditures as well as its federal deficit spending, the US has a borrowed massive amount of money from abroad in order to make up for its shortfall in domestic saving that would in more normal times have served these purposes. This has translated into a wide current account deficit. Either an unwillingness of foreign central banks to purchase US assets at the present rate or a rising interest rate environment that puts a crimp on the consumption economy that has been running on record levels of debt could be the spark that ignites a sudden correction in the asset and currency markets, as well as the real economy.
Longer term, the better investment opportunities are to be found in Asia and in emerging markets, with special focus on economies like India, Malaysia, Thailand and the Philippines. Investors should also overweight European and Asian debt instruments of higher grade and shorter duration. Happy investing!
P/S: Everybody believes that the next few years will sport a rising interest rate environment. You know how I feel when everyone leans on the same side at once.
Rally Has Legs
So far the rally in the equity markets have been going on just fine. Take the STI for instance, which I believe has made a new high for the move, the choppiness in recent weeks notwithstanding. Of course, we always turn to the US markets for direction, and thus far what I'm seeing is very positive. I believe that the rally in the US markets has legs, and there is further upside in the days and perhaps even weeks ahead.
While short term technical indicators are still in overbought territory, this does not mean that the rally cannot continue. Indeed, intermediate term indicators are still doing well and point to at least a couple of weeks more of rising prices, even though a short term consolidation or pullback may be in order. The price action of the S&P on rebound off the pivotal 1060 low has been quite remarkable. Not only has the S&P consistently held above the 200-day moving average since the moment of its breach a few trading days ago, but every time in the past three weeks that the S&P turned its daily chart down, a strong rebound followed. This is undeniably bullish action.
If this bullish action continues, especially after the close of the S&P above the extremely important 1123 level on Friday, I expect that short sellers will be squeezed and a move towards 1040 is in order. As such I strongly recommend AGAINST shorting strength during this period, but instead holding on to long positions with stops at the 1114-1116 level.
Turning to the fundamental picture, the trade deficit has narrowed slightly but still remains above 5% GDP. On a historical basis, such a wide trade deficit endured by any nation has always been unsustainable and has always led to a currency correction. I do not expect to US to be any different in this regard, and I do not believe the old jibe that "this time it's different". The inevitability of global rebalancing and the swings of the business cycle will always be a fact that we have to contend with.
What has happened is that to keep up its capital and business expenditures as well as its federal deficit spending, the US has a borrowed massive amount of money from abroad in order to make up for its shortfall in domestic saving that would in more normal times have served these purposes. This has translated into a wide current account deficit. Either an unwillingness of foreign central banks to purchase US assets at the present rate or a rising interest rate environment that puts a crimp on the consumption economy that has been running on record levels of debt could be the spark that ignites a sudden correction in the asset and currency markets, as well as the real economy.
Longer term, the better investment opportunities are to be found in Asia and in emerging markets, with special focus on economies like India, Malaysia, Thailand and the Philippines. Investors should also overweight European and Asian debt instruments of higher grade and shorter duration. Happy investing!
P/S: Everybody believes that the next few years will sport a rising interest rate environment. You know how I feel when everyone leans on the same side at once.
