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Ernest’s Market Outlook

By Ernest Lim

Market Outlook

Dear all,

Dow has hit daily highs for 11 consecutive sessions, its longest streak of records since 1987!

What’s next for our markets?

S&P500

Just to recap what I have mentioned on 10 Feb 2017 (see HERE), I wrote “various indicators such as RSI, MACD, OBV and MFI continue to exhibit bearish divergences. ADX has slid from 41 in Dec 2016 to close at around 18 on 10 Feb 2017, which is indicative of a trendless market. RSI closed at 70 on 10 Feb 2017. Given the various chart indications, although S&P500 continues to be on an uptrend amid rising exponential moving averages (“EMAs”), I reiterate that S&P500 may have limited potential upside with resistance 2,300 – 2,325. It is unlikely to make a sustained close above 2,325 in the near term.”

I was wrong. S&P500 marched to a record close at 2,367 on 24 Feb 2017.

Based on Chart 1 below, S&P500 continues to be entrenched in an uptrend, as evidenced by its rising EMAs. ADX started to rise from 18 on 10 Feb 2017 to 34 on 24 Feb 2017, indicative of a trend. RSI closed at 80 on 24 Feb 2017. It is noteworthy that RSI only crosses above 80 on a couple of trading sessions in the past three years. Furthermore, based on RSI and MACD, S&P500 is overbought. Although S&P500 has crossed above 2,325 (which I previously mentioned it is unlikely to make a sustained close above), I am very cautious on S&P500 in the near term as the odds of a profit taking increase vis-à-vis two weeks ago.

Near term supports: 2,351 / 2,325 – 2,328 / 2,300

Near term resistances: 2,375 / 2,400 / 2,425

Chart 1: S&P500 has surged approx. 11% since 8 Nov 2016

Chart 1

Source: Chartnexus chart as of 24 Feb 2017

Hang Seng Index

Based on my write-up on 10 Feb 2017, I mentioned that “Hang Seng’s chart continues to look more promising than S&P500. This is due in part to the absence of bearish divergences from the indicators such as RSI, MACD, OBV etc. Furthermore, amid positive placed DIs, ADX has risen from 24 on 27 Jan 2017 to close 28 on 10 Feb 2017. Hang Seng’s EMAs continue to rise with 20D EMA forming golden crosses with 50D, 100D and 200D EMA. RSI closed at around 70 on 10 Feb 2017. Except for one period around Sep 2016 where RSI hit 80, it does not usually exceed the low 70s since May 2015.”

Hang Seng continues to be bullish and rose 391 points, or 1.7% from 23,575 on 10 Feb 2017 to close 23,966 on 24 Feb 2017 (near my previously mentioned resistance of around 23,930).

Based on Chart 2 below, Hang Seng’s chart continues to be on an uptrend as evidenced by its rising EMAs. Amid positive placed DIs, ADX has risen from 28 on 10 Feb 2017 to 37 on 24 Feb 2017, indicative of a trend. Indicators such as RSI, OBV have started to exhibit bearish divergences. After touching a high of 78 on 16 Feb 2017, RSI has slid and close at 62 on 24 Feb 2017.

As previously mentioned, bearish divergences or overbought / oversold are not immediate sell signals. Overbought and oversold conditions can persist for some time. They should be used in conjunction with other indicators.

Near term supports: 23,950 / 23,730 / 23,562

Near term resistances: 24,100 -24,135 / 24,364 / 24,500

Chart 2: Hang Seng’s bearish divergences emerge

Chart 2

Source: Chartnexus chart as of 24 Feb 2017

STI

Amid the various factors which I pointed out in my 10 Feb 2017 write-up, STI’s risk – reward is generally not favourable for long positions. Readers who are extremely nimble may be able to get a few bids of profit here and there. However, they have to be fast to exit long speculative positions, should the tide turn.”

STI rose 0.5% for the past two weeks and closed at 3,117.

Based on Chart 3 below, STI’s chart continues to be on an uptrend. However, there seems to be some cautionary signs that the risk to reward ratio is not favourable for long positions, except for the nimble. Firstly, indicators such as MACD, MFI, RSI continue to exhibit bearish divergences. Secondly, most STI component stocks have already released their results, thus there may arguably be less catalysts to hold on to these stocks as the dividends may only be ex in the next two to three months. Thirdly, with the STI being up 236 points year to date making it one of the best performing stock markets, there seems to be some inflows to selective small mid cap laggard stocks.

Near term supports: 3,100 / 3,084 / 3,064

Near term resistances: 3,148 / 3,161 / 3,215

Chart 3: STI – reiterate risk reward not favourable for long positions, except for the nimble

Chart 2

Source: Chartnexus chart as of 24 Feb 2017

Conclusion – “stock rotation” still in play

As per my write-up on 10 Feb 2017, I mentioned that the recent market trend is “stock rotation”. Since 10 Feb 2017, I have cut loss on my short positions and took profit on some long positions. I have also increased my overall percentage invested from below 50% to 103% in the past two weeks so as to buy / switch into certain small mid cap stocks in anticipation of possibly good set of results to be announced. Such companies are reporting results this coming week.

In the next two weeks, I hope to reduce my overall percentage invested by selling some stocks in the next two weeks. (My clients have, will & are informed on new stocks which I have entered and upon any significant portfolio change.) My personal view is that there may be volatility in March due to the factors below:

a) I continue to be cautious on the overall markets and believe that there may be some form of consolidation or profit taking in March;

b) There are fewer stock catalysts going into March as most companies would have reported their results;

c) For the U.S. side, we will have more clarity on President Trump’s tax and health care reform and infrastructure spending. There may be some profit taking as high expectations have been priced into the market;

d) U.S. debt ceiling will come into debate next month when the latest suspension of the limit expires on March 15. Furthermore, there is a FOMC meeting on 16 March.

e) According to an article on Bloomberg, S&P500 index is trading at 3x P/BV, the highest since 2004;

f) S&P500 is eerily clam. Since 7 Dec 2016, S&P500 has not moved in either direction of 1% or more.

Readers who wish to be notified of my write-ups and / or informative emails, can consider signing up at http://ernest15percent.com. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with 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.