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Ernest’s Market Outlook

By Ernest Lim

Ernest’s Market Outlook

Dear readers,

With reference to my write-up on 26 Feb 2016 (see here), S&P500 and STI completed their bullish double bottom formation by doing sustained breaks above 1,950 and 2,645 respectively. Over the course of the past two weeks, both S&P500 and STI leapt 3.8% and 6.8% respectively.

Amid the recent rally, I have reduced my equity allocation from 54% on 26 Feb to 0% now. (I was 128% invested as of 12 Feb). Why am I in cash now?

Read on to find out more about my technical outlooks and market overview.

S&P500 Index

Just to recap what I have mentioned on 26 Feb 2016 (see here),

  1. I wrote “A sustained close above 1,950 likely indicates a bullish double bottom formation with an eventual measured technical target of around 2,080. A break above 1,950 will have reclaimed an important up trend line established since 2009. Medium to long term trend continues to be bearish until 1,950 is breached on a sustained basis.”

    • S&P500 climbed strongly after making a sustained break above 1,950 and closed +74 points for the past two weeks, to 2,022 on last Fri.
  2. My personal take is that there may not be enough momentum for S&P500 to make a sustained push above 1,950 due to the sliding ADX.

    • This was proven otherwise, as S&P500 managed to break above 1,950 on a sustained basis.

Based on Chart 1 below, S&P500 has completed a bullish double bottom formation. An eventual measured technical target is around 2,080. This signifies potential but may not be reached in the short term. 21D exponential moving average (“EMA”) has formed a golden cross by crossing above the 50D EMA on 8 Mar. Both RSI and MACD closed at four months high at 65 and 22 respectively. ADX continues to slide from 21.6 on 26 Feb to 16.4 on last Fri, indicative of a lack of trend. S&P500 is likely to take a breather and trade within the range of 1,950 - 2,044 in the next two weeks. A break below 1,950 on a sustained basis negates the bullish tinge in the chart.

Near term supports: 2,001 / 1,978 / 1,970

Near term resistances are around 2,018 – 2,022 / 2,040 – 2,044 / 2,080

Chart 1: S&P500 completed a bullish double bottom formation


Source: CIMB chart as of 11 Mar 2016

Hang Seng Index

On 26 Feb 2016, I mentioned that “I will observe whether Hang Seng can close above the 19,850 – 19,960 on a sustained basis before I turn bullish.”

  • Hang Seng gapped up on 1 Mar and traded in a tight trading range between 19,784 – 20,332 for the past eight trading days. It closed at 20,200 on last Fri.

Based on Chart 2 below, Hang Seng seems to have staged a bullish break above 19,784. An eventual technical measured target is around 21,026. However, this indicates potential but may not be reached in the near term. Similar to S&P500, indicators such as RSI and MACD are at four month high levels. ADX has been sliding from 24.9 on 26 Feb to 18.0 on 11 Mar, indicative of a lack of trend. Hang Seng is likely to trade within a range of 19,500 - 20,750 in the next two weeks. A sustained break below 19,500 negates the slight bullish tinge in the chart.

Near term supports: 19,947 / 19,700 - 19,784 / 19,500

Near term resistances: 20,300 / 20,625 / 20,750

Chart 2: Hang Seng seemed to make a bullish break above 19,784


Source: CIMB chart as of 11 Mar 2016

STI Index

  1. On 26 Feb 2016, I wrote that “STI is at an important inflexion around 2,645. The eventual measured technical target of 2,762 continues to be valid as long as 2,645 is not broken on a sustained basis”

    • STI continued its ascent and made a solid and sustain close above 2,645. It hit and exceeded my eventual measured technical target of 2,762 and closed at 2,829 on last Fri.
  2. “Amid the low ADX and the price action observed for the past two weeks plus some gut feel, there may be a lower probability for STI to breach 2,683 – 2,685”

    • The lower probability event happened and STI managed to breach 2,683 – 2,685.

Based on Chart 3 below, STI 21D EMA has just formed a golden cross with its 50D EMA. Its RSI hit 70 on 4 Mar which was an 11 month high and closed at 65 on 11 Mar. MACD closed at 45.9, the highest level since July 2012. ADX climbed from 20.9 on 26 Feb to 25.4 on 11 Mar. It would be good if STI can consolidate first before pushing higher. A sustained break below 2,680 negates the bullish tinge in the chart.

Near term supports: 2,786 / 2,758 / 2,750

Near term resistances: 2,850 / 2,885 / 2,922

Chart 3: STI – one of the best performing markets


Source: CIMB chart as 11 Mar 2016

FTSE ST Small Cap Index (“FSTS”)

On 26 Feb 2016, I wrote that “I will wait for another two weeks to observe FSTS due to the large movements on 22 & 23 Feb. However, suffice to say that a sustained break below / above 368 / 381 should point to an eventual technical measured target of around 355 / 390 respectively.”

  • FSTS broke solidly above 381 and reached and exceeded my 390 level. It closed at 401 on last Fri.

Based on Chart 4 below, if we ignore the large movements on 22 & 23 Feb, both RSI and MACD are around 4 month high levels. FSTS should face some strong resistance around 405 – 410 in the near term. It would be good if we can see some consolidation on the FSTS before it continues ascent. A sustained break below 390 negates the bullish tinge in the chart.

Near term supports are at 399 / 392 / 390.

Near term resistances are at 401 / 405 / 410

Chart 4: FSTS should face some strong resistance around 405 – 410 in the near term


Source: CIMB chart as of 11 Mar 2016

Conclusion

Markets have had a good run for the past four weeks. Since 12 Feb, STI has risen almost 300 points or 11.7% from 2,532 to 2,829 on last Fri. I have already reduced my % invested from 128% on 12 Feb to 54% on 26 Feb and to 0% on 11 Mar.

Why am I in cash now?

  1. Markets have had a good run. It is likely to have some consolidation in the near term;
  2. Bank of Japan, U.S. Federal Reserve and Bank of England meet this coming week. Recent rally was partly attributable to lowered interest rate expectations from the Fed. Any hawkish (or less dovish than expected) statements by the Bank of Japan and the Fed may have an adverse effect on the recent rally;
  3. A rally in oil prices: S&P500 has recently been trading in lockstep with oil with a correlation of as high as 0.90. Oil may see some near term consolidation after jumping 50% from its 12-year low reached last month;
  4. Our Singapore stocks have mostly released their latest corporate results. Except for the dividends to be XD in Apr / May, there may not be any near term catalysts;
  5. The recent indiscriminate buying of penny stocks seems frothy to me. I prefer to err on the side of caution;
  6. I have just closed my portfolio for the year. For clients who know me, they are aware that my portfolio starts and close in Mar. However, I am changing it such that my portfolio ends on 31 Dec so that I can review this portfolio together with my SRS portfolio. Clients and readers who are on my list will receive my portfolio update;

In view of the above, I have turned 100% in cash since the start of 7 Mar. Nevertheless, I am not going to be forever out of the market. I am looking to accumulate some stocks on weakness and depend on company updates. (My clients will be duly informed on new stocks which I have entered.)

As mentioned previously, readers who wish to be notified of my write-ups and / or informative emails, they can consider to sign up at http://ernest15percent.com so as to be included in my mailing list. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails and more details) to my clients first. For readers who wish to enquire on being my client, they can consider to leave their contacts here http://ernest15percent.com/index.php/about-me/

Lastly, many new clients have asked me how I screen and decide which companies to take a closer look / write. To understand more about my basis of deciding which companies to write, you can download a copy of my eBook available on my website here.  

P.S: Do note that as I am a full time remisier, I can change my equity allocation fast to capitalize on the markets’ movements.

Disclaimer
Please refer to the disclaimer here

 
Ernest Lim
Ernest Lim

Ernest is an avid investor, trader cum remisier. He is a Chartered Financial Analyst® charterholder, as well as, a Chartered Accountant of Singapore. He has published articles on a wide range of topics on finance and investment on his blog http://ernest15percent.com/, ranging from market / sector outlook, technical analysis and fundamental analysis etc. His writeups and comments have been featured in various online and mainstream media such as Bloomberg, Business Times, Lianhe Zaobao, Sharesinvestment, Nextinsight etc.

He has worked at GIC Special Investment and was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager for high net worth clients, after which he went to work as an investment manager before embracing his lifelong passion as a remisier.