STI creeps higher one step at a time

With the passing of the month of October, including the 20th anniversary of ‘Black Monday’, the Straits Times Index (STI) managed to get past relatively unscathed. One might be wondering if anything could permanently halt the ascent of the STI. STI closed Tuesday, October 24 trading at 3,334.67, up by 15.13 points. This brings the year-to-date (YTD) performance to 15.8 per cent.

How did the chart of the STI performed during midweek

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index (STI), October 25, 2017)

Looking at the chart of the Straits Times Index (STI), and applying the Fibonacci Retracement (FR) analysis, we noted that from last year’s lows of about 2,760, to the current level of 3,343 as of end Wednesday, October 25, the index has ran up quite a bit, and even touching the peak of 100 per cent on the extreme top of the FR line.

The overall momentum is also riding high as well, as seen by the moving average convergence and divergence (MACD) index below. However, a closer look at the red coloured bar charts on the MACD index that it might not be a suitable time for investors to enter into the market, especially when market euphoria is at its peak. If one were to time the next entry, he/she might want to check if there are any confirmed signals, like red bars turning to green bars, or if the chart as taken a change in direction.

Overview of sectors’ performances

Source: SGX (October 26, 2017)

On a month-to-date basis as of October 26, 2017, all the sectors appeared to be in the positive territory with the Materials sector registering the most growth at 15.3 per cent, and the Telecommunications Services sector registering the lowest growth of 1.61 per cent.

In the following illustrations, we shall take a look at the charts of both sectors to forecast potential trends ahead.

FTSE ST Basic Materials Index

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of the FTSE ST Basic Materials Index, October 26, 2017)

We note that there appears to be a technical breakout in the index with momentum increasing as well. At 103.24, the index is above the major exponential moving averages (EMA) which comprises of 20-day, 50-day and 100-day EMAs. We think that, if the technical breakout can last, the next immediate target could be at 110.

The index comprise of companies in the basic materials industry such as China Sunshine Chemicals Ltd, Jiutian Chemical, NSL, and Sunvic Chemical, among others.

FTSE ST Telecommunications Index

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of FTSE ST Telecommunications Index, October 27, 2017)

At the reading of 953.95, the FTSE ST Telecommunications Index is starting to show some technical rebound since middle of October 2017. The momentum index below is also starting to see some rises, and could be a sign of a start of an uptrend cycle.

The FTSE ST Telecommunications Index comprises of names like Keppel T&T, M1, Pacific Century, Singtel, and Starhub.

How did the STI ended the week

Source: POEMS Mercury Trading Platform (Three-year weekly change in Straits Times Index (STI), October 27, 2017)

The Straits Times Index ended the trading week on a high note, and was up 30 points intraday on Friday, October 27 to close at 3,386.44. Bank stocks, including OCBC Bank boosted investor sentiments when it reported a 12 per cent year-on-year (yoy) growth in profits to end at around S$1.1 billion. The counter closed up 23 cents to end at S$11.80.

Both DBS Group, and UOB are scheduled to report earnings in a fortnight’s time, and both stocks also enjoyed some of the spillover effects of enthusiasm among investors. The stock price of DBS rose 33 cents, or 1.5 per cent to close at S$22.68, while UOB ended the day by trading upwards of 20 cents to end the day at S$25.00 flat.

There is clearly some euphoria among investors, especially with the latest final estimates of the third quarter property market data showing a rise of 0.7 per cent quarter-on-quarter (qoq) in home prices, more than the 0.5 per cent in the flash estimates released in the beginning of October. Not to mention, the Monetary Authority of Singapore (MAS) gave a robust assessment of Singapore’s economic growth in its macroeconomic outlook. The news boosted investor sentiments, and many felt positive about the direction of the economy.

However, as an observer of the stock markets, we would urge investors to take stock of their investment portfolios to evaluate if the current market euphoria has legroom to rise further. We think that adopting active risk management practices are necessary to curb the over enthusiasm. We also urge investors not to be too ‘greedy’ and might want to consider taking profits for those stocks that make money, provided these stocks are able to cover at least the transaction costs.

Hong Kong Market continues to extend higher

Source: Phillip POEMS Mercury Trading Platform (Three-year weekly data of Hang Seng Index (HSI), October 27, 2017)

The Hang Seng Index (HSI) ended the trading week on a high note, and was up 0.8 per cent for the day to close at 28,438.85. However, for the week, the index closed down by 0.2 per cent.

One of the major highlights for the week was the overwhelming election of Chinese President Xi Jiping, and his deputies at the conclusion of the 19th National Party Congress. This has reinforced the immense power President Xi holds as he will take China’s lead in the global world onto the next five years. President Xi has outlined various state-owned enterprise (SOE) reforms during the opening of the Congress, and has also reiterated the Chinese government’s commitment to devote resources to advance the ‘Belt and Road’ expansion.

The Belt and Road initiative is an ambitious strategy that modelled after the old Silk Road as China seeks to extend its influence around the world.

According to Reuters.com, investor sentiments were mostly boosted by the European Central Bank (ECB) moves to extend its monetary stimulus, and positive effect from the chart-topping closing of the major US stock indices.

Summary of Asia-Pacific market performance

Source: Barrons.com (October 27, 2017)

The best performing Asia-Pacific market during the week shown above has so far been Japan’s Nikkei Stock Average (+1.24 per cent), followed by Dow Jones China 88 (+1.22 per cent), and the Nikkei 300 Index (+1.06 per cent).

The laggards shown in the index have been the Jakarta Composite Index (down 0.34 per cent), followed by Sri Lanka’s Colombo Stock Exchange which dropped by 0.31 per cent, and Taiwan Taiex index which fell by minus 0.24 per cent.

On a year-to-date performance comparison, the Hang Seng Index (+29.3 per cent) was the best performing market, followed by Dow Jones China 88 (+26.5 per cent), and India’s Sensex Index (+24.5 per cent).

ECB extends stimulus

Source: Stockcharts.com (One-year weekly chart of Stoxx Euro 600 index, October 27, 2017)

There has been an increase optimism among several European investors, especially when European Central Bank (ECB) President Mario Draghi announced that the institution will agree to extend the bond buying programme for the first nine months of 2018, with the aim of halting the programme by end of next year as long as inflation outlook improves.

The so-called Quantitative Easing (QE) programme has been in place since 2011 to help ease liquidity, and the ECB Governing Council agreed to cut monthly purchases in half to €30 billion, and President Draghi said that a “large majority” backed its decision to include the pledge to extend again if needed.

The news sent European stock indexes rising. A summary of the European markets is as follows:

Source: CNBC.com (October 27, 2017)

Looking at the Stoxx Euro 600 chart above, the weekly change of the index is still showing a positive uptrend, with momentum in the form of the moving average convergence and divergence (MACD) showing pent-up demand, and the 14-day relative strength index (RSI) is also showing positive trend upwards, and close to the ‘70’ mark which is the so-called ‘Overbought’ territory.

A summary of European markets during the week

Source: Barrons.com (October 27, 2017)

Looking at the year-to-date (YTD) changes of each European stock indices, the Turkish BIST 100 index (+38.1 per cent), followed by the Austrian ATX (+30.4 per cent), and the Polish WIG index (+23.8 per cent) were the top leaders in stock returns in the EU region.

The laggards include Russia’s RTS Index (down 2.9 per cent) on a YTD basis. Span’s IBEX was down 1.45 per cent for the week due to continued drive by the independent parties in Catalonia region wanting to seek autonomy from Spain. This has resulted in uncertainties, and concerns among investors, and local businesses. Some of board members representing the multinationals have not proposed any counter solution yet to either move out or stay, and that has led to additional concerns that the European Union could break up.

US markets continue to drive higher led by the likes of FAANG stocks

Source: Stockcharts.com (One-year weekly chart of the S&P 500 index, October 27, 2017)

The major US stock indices, including the S&P 500 stock index closed at major highs, and were largely led by the FAANG stocks like Facebook, Amazon, Apple, Netflix, and Google.

Looking at the weekly chart above, the index has broken various resistance points to climb higher. There has been various minor reversals along the way, but the overall trend is still positive.

The S&P 500 index is also showing high momentum, and the 14-day RSI is still showing the index being in the ‘Overbought’ territory at a reading of 76.62.

The so-called Volatility Index of VIX plummeted to lows of 9.80 from the previous week’s high of around 11.

Source: Stockcharts.com (One-year weekly change of the Volatility Index (VIX), October 27, 2017)

Amazon led the biggest gains

Source: Phillip Mercury Trading Platform (Three year weekly change in Amazon (AMZN) stock, October 28, 2017)

We noted from the weekly chart of Amazon (AMZN), the stock has not looked back throughout the past three years. The stock closed at an all-time high of US$1,105.58, and with huge trading volume of 30.89 million shares. The e-commerce giant reported earnings on Thursday with an earnings per share (EPS) of 52 cents as compared to the consensus estimate of 3 cents per share.  The Amazon Web Services, the company’s cloud business led the major gains with sales topping a high of 42 per cent on a yearly basis.

AMZN also received some spillover effects from sales of its Whole Foods grocery chains which was acquired in August.

Microsoft and Google’s parent, Alphabet also reported earnings beats with the former recorded its biggest one-day gain since October 2015. Alphabet reported an adjusted EPS of US$9.57, topping the consensus estimate of US$8.33 per share.

Friday’s trading day was also dominated by several good economic news including the latest third quarter gross domestic product (GDP) growth estimate of 3 per cent, and is above the 2.5 per cent forecasted. Although the month of August was dominated by hurricanes, the weather events have not stopped the United States from the various production and consumption activities.

How did our model portfolio performed

Note: Model equity portfolio performance as of October 27, 2017. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 86.6 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on July 01, 2017. This compares to the total return of 14.5 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic Group (up 43.4 per cent since end June 2017); followed by Cogent (up 38.6 per cent since January 2017), and Mapletree Logistics Trust (up 26.1 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Sheng Siong (down 5.1 per cent since June 2017); followed by SATS Ltd (down 3.1 per cent since end December 2016). We have sold all our positions in Soilbuild Business Space Reit last week.

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of December 2017.

Schedule of company earnings for next week

Source: Phillip Securities Pte Ltd, SGX

A slew of earnings reports expected in the coming week, including blue chip counters like Ascendas Reit, Sembcorp Industries, Starhub, and UOB. UOB is the second bank counter to report earnings, and with recent upgrades of the stock price, investors would be looking out for the trend of its non-performing loans (NPL) ratio, the wealth management business, and its overall loan business.

Schedule of local economic reports

Source: TradingEconomics.com

One the key local economic data to look out for is the Purchasing Managers Index (PMI) as the electronics sector has been one of the major drivers for growth. It would be interesting to know if the trend persists.

China economic data release

Source: TradingEconomics.com

Some of the key economic data investors will be most interested in the October month-end manufacturing purchasing managers’ index which features prominently each month. The month of October is also critical as there was a one-week Golden Week period, and several mines were shut down in the effort by the Chinese government to curb pollution issues.

US markets focusing on jobs creation

With the month of October about to end, investors will be watching some key economic data releases including personal income, and spending. This is followed by the month-end changes in private sector employment figures, and the US Federal Reserve’s interest rate decisions. Most market watchers are not expected that the Fed will announce any hikes next week, and possibly deferring the decision to the following month in December.

The all-important US payroll figures will be out on Friday, November 03 where economists are forecasting 300,000 jobs created, and unemployment rate remains unchanged at 4.2 per cent.

All these data provide several clues as to the Fed’s direction. With the expected announcement of a new Fed chair to replace current chairperson Janet Yellen, the markets will be watching how US President Trump’s nominee for the chairperson seat will fare in his/her monetary policy thinking in the coming months.

Overall, we think investors should take stock of their investments in an increasing bullish market environment. The decision to enter or exit will depend on your investment objectives, and whether it is in line with the overall diversification goals. The decision should also incorporate good risk management practices to minimise any large exposures to certain counters that could tilt the returns onto either extreme ends. Good luck all.

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About Peak Hour 62 Articles
Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning