The STI crosses the 3,300-resistance level. So, what now?

With the US financial markets roaring with attention focusing on the technology sector earnings announcements, the trading activity among is somewhat muted, and focusing on various small-cap issues like Sincap, Rowsley, Swee Hong, LeyChoon, Japfa, and Addvalue Technologies, among others.

With three-quarters of the day into market trading on July 26, 2017, the Straits Times Index (STI) trading volume is around 2.4 million shares worth S$947 million, as compared to the previous day’s trading volume of 2.8 million shares worth S$1.2 billion.

The index has also outpaced with around 15.52 per cent year-to-date (YTD) return since the beginning of the year, and its returns are easily exceeded the 10 per cent or so return YTD during the same period for the FTSE ST Catalist Index as shown below:

Source: POEMS 2.0 Trading Platform (Crossover chart of one-year daily charts of STI (Blue) Index, and the ST FTSE Catalist (Yellow) Index, July 26 2017)

With the earnings season, still in its early progress, we noted that a majority of the companies, especially the STI component stocks continued to deliver dismal returns. For example, SIA Engineering Company (SIAEC) delivered poor earnings with core net profits declining 13 per cent yearly in 1QFY2018 as noted in a recent research note by UOB Kay Hian. SIAEC reported their earnings on Tuesday, July 25 showing its top-line growth being flat on a yearly basis.

SIAEC also guided that recent initiatives and investments are unlikely to be accretive in the near-term. Its valuations remain rich at 26x FY18 Forecast P/E ratio, ahead of peers in the Maintenance, Repair, and Operations (MRO) industry.

Other analysts like Corrine Png of Crucial Perspectives were quoted by CNBC.com as noting that SIAEC secured “several game-changing business developments”. In a recent Barron’s report, the analyst was quoted in her report noting that new partnerships with global providers that could help fuel new earnings growth in the years to come. The contracts include a joint venture (JV) with General Electric (GE) to provide MRO services mainly in Boeing (BA) 777 aircraft. A separate deal has been announced with Pratt & Whitney, a United Technologies Inc. (UTX) subsidiary, which makes engines for the Airbus A320neo jet.

How did the SIAEC stock perform

Source: Phillip Mobile Sales Force (MSF) Platform (One-year daily chart of SIA Engineering Company stock price as of July 26, 2017)

Looking at the chart, along with SIAEC’s ex-dividend date on July 26, the stock fell hard with a 4.1 per cent intraday decline to end the trading day at S$3.71 per share. There were about 1.39 million shares traded during the day.

The stock fell from a peak of $4.21 per share in late June, with the 50-day and 100-day Moving Averages (MAs) starting to flatten out. We think that the stock has some room to fall, but there could be some short-term rebounds, but is unlikely to rise to a meaningful level unless there is a dramatic turnaround in the overall business.

Noble Group under the radar again

Noble Group, a diversified commodities trading company, released a press statement that it will likely report a loss of as much as US$1.8 billion, and will be selling its Global Oil Liquids business. It has shortlisted a number of potential bidders. The company added that it has also struck a deal to sell its Noble Americas Gas & Power subsidiary to Mercuria Energy America for US$248 million, expecting the deal to close by the end of the year. According to the company, these two deals will allow it to retire two secured revolving credit facilities which totalled around US$3 billion.

Investors reacted to the news by selling down the stock to as much as 48.7 per cent on Thursday. The stock fell another 7.59 per cent to end the trading week at S$0.365 per share.

The latest news appears to be continuation of a series of letdowns following the 10 to one share consolidation exercise taken earlier this year to shore up its investor base, install market confidence in the company, and undertaking capital preservation exercises. However, these corporate exercises appeared to look futile even though head honcho, Mr. Richard Elman stepped down from his chairmanship in the company, and appointed an experienced corporate turnaround specialist and independent non-executive director, Mr. Paul Brough to replace Elman.

How did Noble Group stock performed through charts

Source: Phillip Securities Mercury Platform (July 28, 2017) (One-year daily chart of Noble Group stock)

Taking a look at the one-year daily chart of Noble Group, we noted that since retreat of the stock since its all-time high of S$2.80 per share back in February, the stock is showing no signs of abatement or an end in sight for the continuing price downturns. With the exception of one long negative candlestick in early May 2017, the stock has been moving sideways after the latest corporate action.

What are our thoughts on Noble Group

Investors are advised to seek the opinions of their licensed independent financial advisers for detailed aspects of holding onto the stock. However, if we were to examine the financials, and taking into account the various aspects of the business, we think that there is a need to re-examine the stock’s fundamentals before making any investment moves on Noble Group. This would also include understanding the business model, the risks and returns associated with Noble Group.

Hong Kong’s Hang Seng on the tear despite brief pullback on Friday

Hong Kong’s Hang Seng Index (HSI) has been quite resilient climbing to another high from last week to close at 26,979.39 on Friday, July 29. This was down by 151 points from the previous day’s close at 27,131.17.

Source: Phillip Mercury Trading Platform (One-year daily chart of the Hang Seng Index (HSI), July 28 2017)

Looking at the chart, we noted that for each successive day of gains, the length of the candlestick is shorter, while the relative strength index (RSI) below is showing various signs of ‘Overbought’ situations. Using these observations, we think that a correction in the index could be overdue.

Investors who might be thinking of entering into the component stocks that from the HSI might want to evaluate the company’s fundamentals, and understand the business models. Most of the HSI-listed stocks are well sought after by investors, but despite the high quality stamp attached to these HSI component stocks, there is a need to evaluate the company and its fundaments before deciding on entry or exit points.

European stocks head south

While global markets including the major Asian and US markets are heading up, European stock indices appeared to be lagging, and instead head south. An example will be the pan-European stock index, the Stoxx Europe 600 index declined to close at 378.34, along with negative momentum shown in the RSI (above the chart), and the moving average convergence and divergence (MACD) diagrams.

Source: Stockcharts.com (One-year daily chart of the Stoxx Europe 600 stock index, July 29, 2017)

We also noted that since the end of June and beginning of July this year, the index has been on a downtrend with the RSI following the main index in tandem fashion. Moreover, the 12-week and the 26-week MACD lines are showing negative trends.

We think that if the index were to break the 375 price support, the index could move lower to 370. However, if it manages to break the downtrend cycle, there is a potential of the index heading upwards to 385 in the intermediate term.

European economic data looks bright

On Friday, July 28, the European Commission (EC) released the economic sentiment index hitting 111.2 in July from 111.1 in June. Other European nations like Spain, the United Kingdom and France all recorded robust gross domestic product (GDP) growth rates. Spain’s GDP rose by 0.9 percent in 2Q2017, followed by French’s GDP which grew at 0.5 per cent, and UK’s GDP rising 0.3 per cent higher over the same period.

European manufacturing output on an uptrend

Source: Tradingeconomics.com (Euro-Area Manufacturing Purchasing Manager’s Index (PMI) July 29, 2017)

The latest Euro-Area Purchasing Manager’s Index (PMI) is also trending higher and this is an important forward-looking indicator in evaluating the economy’s growth.

Although, we noted that July’s PMI declined a bit, we think that it could be seasonal due to the summer holidays, and brief production shutdowns in order to do re-tooling. However, we do not think the downtrend could persist longer than expected.

Major US stock indices broke new highs again

The post US Federal Reserve meetings where Fed Chairperson, Janet Yellen spoken out on the topic of benign inflation levels, and no longer sees inflation as a major threat to the overall economy, equity markets staged an upsurge with all the major US stock indices registering all-time highs for the week as shown in the CNBC.com graphic below:

Source: CNBC.com (July 28, 2017)

The latest trading week saw the technology sector staging an upsurge especially for some of the component stocks among the FAANG stocks, namely Facebook, Netflix, and Alphabet (Google’s parent company).

Source: Stockcharts.com (One-year daily price chart of the Nasdaq Stock Index, July 28, 2017)

Looking at the chart above, we noted that despite a sharp decline of the Nasdaq Composite Index as seen by the long red candlestick at the extreme right hand side of the chart, the index is still not at an ‘Overbought’ stage at 60.98. The 70 level is considered as ‘Overbought’ stage.

The momentum indices like the MACD chart below is showing the 12-week trend line moving ahead of the 26-week trend line, with relatively high trading volume. There might explain part of the bullishness among investors.

Volatility levels are still low, despite a brief climb on Friday

Source: Stockcharts.com (One-year daily chart of the Volatility Index (VIX), July 28, 2017)

Although the Volatility Index (VIX) staged a brief upturn on Friday to end at 10.29, the overall trend is still negative which suggests that the overall markets are feeling confident of the current stock market conditions, and are taking on more risks to extrapolate overall returns.

The low volatility levels, combined with record breaking stock index levels do make some investors pause, and perhaps think through the potential fallouts from such situations. We think that investors do need to take a step back sometimes to evaluate whether they should follow the bandawagon, or to lower their risk exposures.

How did our model equity investment portfolio perform

Note: Model equity portfolio performance as of July 28, 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 80.8 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 14.7 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 Mapletree Logistics Trust (up 18.2 per cent since Nov 2016); Ascendas Reit (up 15.3 since November 2016); and Cogent Holdings Limited (up 11.4 per cent since January 2017).

The model equity portfolio did experienced a shortfall coming from Sheng Shiong (down 3 per cent since June 2017), Soilbuild Business Space Reit (shortfall of 1.4 per cent since June 2017), and Straits Trading Limited (down 0.8 per cent since June 2017).

Given the portfolio is at its month-end, we are not planning to make any changes or do any rebalancing for the portfolio. We shall review the overall portfolio at the end of August 2017.

What are the earnings events to look out for next week (Week of July 31 – August 4)

Source: Phillip Securities Pte Ltd, SGX

We think that investors will keenly await for earnings results coming from STI component stocks like Starhub (August 02), CapitaLand, Sembcorp Industries (all on August 03); DBS, Jardine Matheson, UOL (all of August 04).

On the local economic events, here is a summary of the key economic data and dates:

Source: TradingEconomics.com

The new week will also see the two China’s Purchasing Managers’ Indices (PMIs) being released. The official manufacturing and services PMI published by the National Bureau of Statistics for July will be released on Monday, July 31, followed by the Caixin Manufacturing and Services PMI data which are scheduled for release on Tuesday, August 01, and Thursday, August 03 respectively.

The consensus estimates of the official and the private sector PMIs for China is 51.6 for the former, and 50.4 for the latter.

A reading of 50 indicates breakeven levels for expansion and contraction.

Over in the US, the key economic data releases many investors will be eyeing upon are the ISM Manufacturing PMI (Tuesday, August 01), followed by ADM Employment figures (Wednesday, August 02), ISM Non-Manufacturing PMI (Thursday, August 03), and US Balance of Trade figures (Friday, August 04).

The all-important US jobs data will be released on Friday, August 04 by the Bureau of Labour Statistics. Consensus estimates call for the creation of 187,000 payrolls created, with unemployment rate dipping slightly to 4.3 per cent during the month of July. If readers could recall, June’s payrolls data showed 222,000 jobs created with the unemployment rate remaining at 4.4 per cent.

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About Peak Hour 55 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