STI defies ‘January Effect’ followers by moving higher

The ‘January Effect’ has most stock investors have often say is a typical market phenomenon observed each year during the beginning of the year where institutional and retail investors are likely to sell their holdings as part of their rebalancing strategies, or to take profits after coming back from their holidays in December. Some may think that if January is a ‘sell down’ month, and is going to get worst, the rest of the year is likely to be bad.

However, if readers were to look forward in 2018, the expected selling, so far, has not shown up, and in fact, the Straits Times Index (STI) is now 3.5 per cent up for the year as we entered into the middle of January.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), January 15, 2018)

On Monday, January 15, 2018, the STI did exactly the opposite of what many short sellers, or market sceptics would not have expected. This time, by moving up higher by 15.86 points to close the trading session at 3,536.41.

Looking at the chart trend, we note that the index is reaching the upper echelons of the stratosphere, having surpassed the 78th percentile (3,420.54) using the Fibonacci Retracement (FR) analysis. Moreover, the 20-, 50-, and 100-day moving averages (MAs) are trending upwards with not many signs of any capitulation.

When examining the relative strength index (RSI) below the main chart, we also noted that the index is close to the ‘Overbought’ territory of 70, along with the continued run up in the momentum index

Notable Counters that roared ahead

The twin oil and gas counters, Keppel Corporation Limited and Sembcorp Marine moved higher along with optimism among investors on the securing of new contracts, recovery of oil prices, and possible inclusion to the Straits Times Index for Sembcorp Marine. These three factors have moved the stock prices of the oil and gas sector up. This is evident based on the weekly percentage gains shown in the FTSE ST Oil and Gas Index:

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of the FTSE ST Oil and Gas Index, January 19 2018)

At the current level of 439.75, it is now almost 5.5 per cent gain from last week, and is still moving up higher. The 14-day relative strength index (RSI) is also approaching close to the ‘Overbought’ levels at close to 70, while the MACD indicator appears to show increasing momentum as seen on the lowest end of that chart.

Will oil prices stay high for a longer period

This question is filled with a lot probabilities, and most certainly there are plenty of market watchers taking opposing views on the direction of oil prices. However, one thing is certain that there has been a major pull back of oil prices since the end of the Global Financial Crisis (2008 2009) where almost all asset classes suffer some sort of capitulation.

The fundamentals for the stock picks remain intact, but there are still lots of excessive supply to work them down. Moreover, orders for jack-up drill have not been coming on board fast enough to absorb the supply backlog, the closing off of fields, and continued high valuations for Sembcorp Marine.

The recent recovery in share prices in many O&G names is not surprising given the beaten down prices, and the recent recovery of crude oil prices to around US$60 – US$70 per barrel. The only question left is the sustainability of oil prices going forward, and not many people know until overall commodity price stay stable.

Sembcorp Marine closed Friday’s session at S$2.30 up 20 cents or 9.5 per cent intraday, while shares of Keppel Corporation Limited closed S$8.25 per share or 13 cents up (1.6 per cent intraday).

How did the Straits Times Index perform at the end of the trading week

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of the Straits Times Index (STI), January 19, 2018)

The Straits Times Index (STI) at 3,550.36 is one of the highest record for the week as it rose by another 29.05 points. The rise in the index brought a weekly return of 1.2 per cent increase, and a year-to-date (YTD) return 4.3 per cent. Overall, a total of 1.47 billion shares changed hands which is a particularly exciting given there are continued uncertainties over the debt ceiling impasse happening in the United States.

In dollar terms, the total volume is equivalent to close to S$1.4 billion with 271 winners and 165 losing stocks.

 Hang Seng Index tops out at close to 32,000

Hong Kong’s Hang Seng Index (HSI) is on a ‘super’ uptrend closing at 31,904.75, up 565.88 points on Tuesday, January 16, 2018. This was thought to be the all-time high for the index. According to Bloomberg.com, the intraday high was 31,958.41. The gains have been driven in part by capital inflows from Mainland China, and institutions (‘H’ shares in Hong Kong relative cheaper than ‘A’ shares in Mainland), along with the weakness of the US Dollar as shown in this Bloomberg chart on the index values relative to the price of the US Dollar Index (DLX).

Source: Bloomberg.com (January 16, 2018)

How is the HSI index performing

Source: Stockcharts.com (One-year daily chart of the Hang Seng Index (HSI), January 16, 2018)

Looking at the index, there appears to be no bearish divergence shown as the index climbed higher to end Tueday’s (January 16, 2018) trading at 31,904.75. The 14-day relative strength index (RSI) is showing ‘Overbought’ conditions, but investors have reckoned that with a market price-earnings (P/E) multiple of around 13 to 14 times, it is still relatively cheaper as compared to the US stock markets which are trading at an average of 20 times.

The moving average convergence and divergence (MACD) index below the main chart is also showing an upsurge in momentum.

European stocks continue to run up

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of Stoxx Euro 600 index, January 19, 2018)

The pan-European Stoxx Euro 600 index rose on Friday on the back of good set of economic numbers. According to CNBC.com, it was reported that euro zone current account numbers released on Friday showed a wider account surplus in November compared to October 2017. The adjusted surplus grew to 32.5 billion euros (US$39.92 billion) from 30.3 billion euros in October, and this is shown by the chart below which noted the decline in the Euro to US Dollar exchange rate in October and November 2018 before it came back on a strengthened manner this year (2018).

Source: Stockcharts.com (One-year daily chart of the Euro/USD exchange rate, January 19, 2018)

What are the risks ahead

The events to watch out in the coming months include the follow-through on the ‘Brexit’ talks between United Kingdom the European bloc. CNBC.com reported on Friday that French President, Emmanuel Macron had argued that there cannot be any special access for the City of London post-Brexit. He added that if the UK wants access to the single market, including the financial services industry, the country will need to contribute to the EU budget and follow European jurisdiction. The stance made by President Macron is another sign that talks between both parties are continuing and a compromise or an agreement is not finalised yet.

US markets rose on earnings growth

This week, we received the latest news on Saturday, January 20 (Singapore local time) the US government is officially in shut down mode after US lawmakers fail to come to a compromise over the debt ceiling, and tussle over issues, including the immigration of children of illegal migrants known as the ‘Dreamer’ Act (short for Development, Relief and Education for Alien Minors Act). The Act, which majority of the Democrat Party supported it calls for the granting of legal status to certain undocumented immigrants who were brought to the United States as children and went to school there. However, US President Trump and the Republican Party vehemently oppose it calling it as a free pass for undocumented immigrants and their children, and compromising the national security of the country.

The disagreement over this issue was one of the main contending issues that led to the US government shutdown. It also comes at a time when all the major US stock indices are on their new highs as shown by the weekly chart of the S&P 500 index.

Source: Stockcharts.com (One-year weekly chart of the S&P 500 stock index, January 19, 2018)

Looking closer at the one-year weekly chart of the S&P 500 index, we noted that at Friday’s close of 2,810.30, the index has surpassed many expectations and have blew past previous estimates. Despite the 14-day relative strength indicator (RSI) showing significant ‘Overbought’ levels, investors have not stepped back or hesitate. Not even the potential of Friday’s debt ceiling impasse stopped investors from dipping their hands and feet into stocks. The market continues to cheer at the earnings results of the major banks, and other companies. According to a CNBC report, citing a report from ‘The Earnings Scout’, among companies that have reported quarterly results as of Friday morning (US time), 79 per cent have exceeded expectations while 89 per cent have surpassed sales estimates.  Morgan Stanley (MS), and American Express (AXP) were among the companies that reported better-than-expected earnings results during the week.

A summary of the closing figures for the major US stock indices, and key stock prices

Source: CNBC.com (January 19, 2018) (Note: GS stands for Goldman Sachs)

How does a government shutdown expect to hurt global markets

Come Monday, when Asian trading day starts, most Asian bourses might feel some impacts, but are unlikely to damper enthusiasm among investors. However, the direction of the markets is contingent on the time period for all lawmakers to come to a common agreement, and the time taken needed to finish negotiations. Both sides, at this point refused to budge or give way, and the longer they prolonged, it makes the issue more complicated.

How did your model investment portfolio perform

Note: Model equity portfolio performance as of January 19, 2018. 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 86.9 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 20.1 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  (up 50.0 per cent since end June 2017); followed by SATS Ltd (up 21.6 per cent since December 2016), and Ascendas Reit (up 17.9 per cent since November 2016).

The model equity portfolio did experience a shortfall coming from Sheng Siong (down 4.5 per cent since June 2017); followed by Straits Trading Company  (down 4.5 per cent since end June 2017), and Singtel (down 4.8 per cent since December 2016).

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 March 2018.

Upcoming Earnings News next week

Source: SGX, Phillip Securities Pte Ltd

The rounds of earnings results reporting continues next week with a host of mostly S-Reits reporting, and perhaps an important earnings event could be Keppel Corporation which reports slightly over a month after the news of the settlement for the Brazilian corruption case came out last month.

Economic events to watch this week

Singapore

Source: TradingEconomics.com

China

Source: TradingEconomics.com

United States

It is not known if economic data releases are expected to be released given the expected US government shutdown this week. Some of the key numbers to be released, assuming normal conditions revert include new and existing home sales figures, GDP growth rate which is expected to come in at 3.2 per cent during 4Q2017, and durable goods orders for the month of December 2017.

In summary, earnings news and the comparisons against estimates are some of the drivers for the continued rise in overall stock markets. However, there are still many sceptics, and most will question the sustainability of the market rises. Despite these questions, the notion of a grey “January Effect’ is expected to pass up for a brighter outlook.

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About Peak Hour 86 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