Minimal hurricane damage in US, War is averted for now, but STI crawls hard

With the downgrade of the wind strength from Hurricane Irma over the Gulf Coast in the United States, global stock markets roared with the major US stock indices registering record gains, despite an uncertain political landscape in the US, the North Korean threats, and the uncertainties over the upcoming US Federal Reserve interest rate decisions.

The uncertainties, and rush to clear unprofitable equity holdings led the Straits Times Index (STI) to decline in the last consecutive two days since the start of the week.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of The Straits Times Index (STI) dated September 13, 2017)

We noted from the above one-year daily chart of the Straits Times Index (STI), the index is now hovering around the 100-day moving average (MA) (green colour) level of 3,232.82.  We also noticed that the 20-day MA line (yellow colour) has now crossed below the 50-day MA line (blue colour). This is quite significant as the index at the closing level of 3,230.36 as of Wednesday, September 13, 2017 is now 3.7 per cent from the all-time high of 3,354.71.

Similarly, on the moving average convergence and diverge (MACD) chart below, we noted that the 12-day and the 26-day MA is trending downwards.

Using the Fibonacci Retracement (FR) analysis, the index is currently close to the 78.60 percentile line with the reading of 3,226.16. If it breaks below this level, we think that the next level to watch is 3,125.89 on the 61.8 percentile level.

Potential beneficiaries from iPhone X launch this week

With the latest launch of iPhone X launch, along with the favour shown by many investors in the name, several local counters which may be seen as beneficiaries moved  up quite significantly especially Venture. We shall take a look at each name, namely UMS, Sunningdale, Memtech, and Venture.

UMS stock had a brief spike upwards, and a pullback is a possibility

Source: Phillip POEMS 2.0 trading platform (One-year daily chart of UMS Holdings, September 13, 2017)

We noticed that volume picked up, along with price per share for UMS Holdings. At the close of trading day on Wednesday, September 13, the stock is trading at S$0.945, up 3.5 cents on the day with a total volume of 7.5 million shares traded.

We also noticed the 20-day MA and the 50-day MA lines are starting to converge. We shall watch if the 20-day MA line starts to move below the 50-day MA. We think the stock price surge is not sustainable and could probably fall again once news from the iPhone X launch is settled.

For investors who are monitoring the stock, you might want to put in a price alert if the stock hits $0.85 per share.

Fundamentally, the stock is trading at 11 to 12 times historical price-earnings (P/E) ratio, according to data from SGX Stockfacts. The dividend yield is around 5.4 per cent, and current ratio is about 5 times. The company has no significant debt holdings, and its interest coverage is high.

Sunningdale has a nice climb upwards, and could continue is upward trajectory

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Sunningdale Tech, September 13, 2017)

Sunningdale Tech has a quite a record run upwards from the lows of S$1.00 per share in September 2016, to the current closing price of S$2.00 per share as of September 13. The volume traded was 1.18 million shares, and the stock was trading up at 2.5 cents.

We noted that the stock just crossed above the 20-day MA line of around S$1.99. However, the price increase was not supported by volume increases as shown in the chart. We are quite cautious on whether the stock can continue to climb higher.

Fundamentally, the stock trades at around 7 to 8 times historical P/E multiple, with dividend yield of about 4.4 per cent, according to SGX Stockfacts. The company generates positive operating cash flows for the past five financial years, and its debt-to-total equity stands at around 28 to 30 per cent. Its interest coverage is around 19 to 25 times. The current ratio is more than 1 at 1.7 times.

Though the stock looks fundamentally okay, we think that investors could be patient and perhaps monitor for any short-term correction before picking up the shares. We are looking for the price to come back down to S$1.80 to S$1.90 before deciding to pick up the shares.

Memtech trades relatively flat, but will continue to monitor

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Memtech International, September 13, 2017)

We noted from the one-year chart of Memtech, the stock is currently hovering close to the 20-day MA line of S$0.95 to S$0.96 per share. The stock closed at S$0.965 on September 13 with total trading volume of 144,000 to 150,000 shares.

With the low trading volume, it is quite difficult to extrapolate any meaningful observations for the stock.

Fundamentally, the stock trades at around 7 to 8 times historical P/E with dividend yield of 2.5 per cent, according to SGX Stockfacts. The company generates positive operating cash flows for the past five years, and its current ratio is 2 to 3 times. The company has little debt and its interest coverage is high.

Venture trades high, resulting in SGX query

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Venture Corp, September 13, 2017)

On September 13, 2017, the stock price of Venture Corporation Ltd shot up high and closed at $16.75 on trading volume of close to 4 million shares. The short spike shown on the chart above has prompted the Singapore Exchange (SGX) to issue a trading query. However, the company issued a statement saying that it was not aware of anything that might pushed up the stock price.

We noted from the chart that the stock has a decent run from about S$9.00 per share a year ago to $16 to $17 per share. This is a 82.8 per cent increase from a year ago. The company has been beating analysts’ expectations, and happened to be in the right place at the right time with the booming semiconductor space and various new product refreshers.

Fundamentally, the stock is trading relatively expensive at 19 to 20 times, with dividend yield of 3 to 4 per cent, according to SGX Stockfacts. We noted that the company generates around S$200 million worth of positive operating cash flows for the past five years, and its current ratio stands at around 2 times. The company has no significant debt holdings and has high interest coverage ratios.

Never say never, North Korea launched another missile over Japan

North Korea did another controversial thing by launching another missile, this time, on a regular market trading day in Asia on Friday, September 15, 2017. This time, the rouge nation did for a second time, in less than a month, by firing a missile during the early morning hours which landed in sea over northern Hokkaido.

Markets reacted immediately with major Asia-Pacific stock indices coming down at the start of the trading day. For example, the Straits Times went down almost 15 to 20 points lower at the start of the trading day, but ended the market trading day at 3,209.56, down 11.39 points.

Source: Phillip POEMS 2.0 stock trading platform (Four-hour daily chart over the past 20 trading days, September 15, 2017)

We noted that the STI is taking a downward path for the past one month and has not seen its itself gone above the 20-day MA (yellow colour line).

Moreover, the moving average convergence and divergence (MACD) indicator shown below is now in negative reading territory.

Looking at the one-year daily chart, the STI is now trading at below that 78.6 per cent Fibonacci Retracement (FR) line at 3,226.16. The next level to look at is 3,200.

Source: Phillip 2.0 trading platform (One-year daily chart of the Straits Times Index (STI), September 15, 2017)

Hang Seng Index defies market norms, edges higher

Source: Stockcharts.com (One-year weekly chart of the Hang Seng Index (HSI), September 14, 2017)

Hong Kong’s Hang Seng Index (HSI) is perhaps one of the few Asia-Pacific region markets that have seen rapid increases each month since the start of 2017. This is despite the less than stellar economic data coming from China this week, namely the lower than expected industrial production, retail sales, and fixed asset investments. According to Bloomberg.com, the breakdown of the key August 2017 economic figures is as follows:

  • Industrial output rose 6 per cent from a year earlier in August, as compared to median forecast of 6.6 per cent and July’s 6.4 per cent.
  • Retail sales rose by 10.1 per cent, as compared to forecast of 10.5 per cent, and 10.4 per cent in July.
  • Fixed-asset investment in urban areas rose 7.8 per cent, as compared to forecast of 8.2 per cent. It was said to be the slowest since 1999.
Source: Bloomberg.com, National Bureau of Statistics, China (September 14, 2017)

Despite this poor economic numbers, and is showing some signs of a downward trend, most investors do not seem to be bothered by the poor economic figures, and are perhaps thinking of the long-term forecast for China, especially with their Belt and Road strategy which could expand their reach to overseas markets.

Moreover, there has been some relaxation of the reserve requirement ratios to spur lending. On Monday, September 11, China’s People’s Bank of China (PBOC) loosened its foreign exchange reserve ratio to zero, and was justified by the Chinese government as it acknowledged that the market environment has changed.

In my personal opinion, the latest change could see a gradual opening up of its markets, though certain sensitive areas like foreign exchange is still being closely monitored. We think that this could be beginning of greater liberalisation of the Chinese market as the Chinese Communist Party (CCP) will hold its party congress in October to select new leaders. We think despite the no-nonsense attitude shown among the Chinese leaders that are led by President Xi Jiping, his team understood the importance of trade, and keeping markets open. It could also be a competition for power and influence in the Asia-Pacific region when the United States is starting to turn inwards.

Incidentally, the Hang Seng Index (HSI) closed out the week at 27,807.59, up by 30 to 31 points. It is also 46 to 47 per cent increase since the early 2017 level of close to 17,000 to 18,000. The chart of HSI shown earlier has also seen a ‘golden cross’ formation sometime in the June to July 2017 timeframe. This is where the 50-day MA (blue colour line) ‘cuts’ above the 200-day MA (red colour line). This is also a key information that a continuing nice run is ensued as shown in the index.

European stocks fell on Friday, but rose on the week

The Stoxx Euro 600 index fell 0.36 per cent on Friday, Sept 15 on North Korean worries, and the London train attack. The index closes out the week at 380.41, and was 1.3 per cent higher for the week since the week of July 14.

Source: Stockcharts.com (One-year weekly chart of the Stoxx Euro 600 index, September 15, 2017)

With the optimism of recent polls which suggest that the upcoming German elections might not produce a flawed result and could leave the existing government led by Chancellor Angela Merkel intact, the pan-European Stoxx Euro 600 index appears to have recovered most of its previous losses, and is trending upwards slowly.

There appears to be some turnaround shown on the chart where the index (seen at the extreme right-end of the chart) appears to turn up. The index is also above the 50-day MA, and moving upwards. We think that if the index could hold onto to this chart pattern, along with rising momentum and trading volume, the index could head up close to its former high of 400 in the next six months. However, it fails to hold onto the existing trend, there is a possibility for the index to go lower, possibly close to 356 to 360 at the extreme low levels.

We noted that in our previous discussions on the Stoxx Euro 600 index that having dropped from the peak of about 390 to 400 since May 2017. However, optimism returned recently with European Central Bank (ECB) apparent move to halt further bond buying, possibly in 2018, favourable unemployment numbers, rising industrial production, particularly in Germany, rising Euro currency against foreign currencies like the US Dollar, and free trade agreements that are being worked out with countries like Australia and New Zealand, among others have contributed some of the optimism among investors.

Moreover, European voters have so far minimise any political fallouts by electing any far-right leaders have led to some investor confidence. We also noted that the upcoming German elections, if it all goes well, could see some continuity in the leadership of Merkel who is on track for her fourth term in office.

Despite the positives, there are some minor challenges investors might take note including the ongoing ‘Brexit’ talks with the United Kingdom, and the spate of terrorist incidents where European leaders are trying their best to contain any rapid outbreak of incidents that might cause damage to long-term investor and voter confidence.

US markets continue their march higher

With the end of US Labour Day on September 01 last week, the US markets are entering into its eight year of bull run since March 2009 when the US Federal Reserve started to loosening its monetary policy back then, and is now trying to slowly unwind by first normalise the Fed Fund rate, and reducing their US$4.5 trillion US Treasury, and Agency Bond debt.

Summary of the US market closing numbers:

Source: CNBC.com (September 15, 2017)

According to the CNBC.com  article summing up the overall US markets, most of the index stocks rose for the week largely driven by technology sector stocks like Apple, and Facebook. The former debuted its new line-up for iPhones, including the iPhone 8, 8-plus, and the iPhone X. As one noticed, the Nasdaq Composite Index ended the trading day on Friday, September 15 with the largest daily percentage gain of 0.3 per cent, or 19.38 points higher to close at 6,448.47.

S&P 500 moves higher, and have not looked back

Source: Stockcharts.com (One-year weekly change in the S&P 500 index, September 15, 2017)

On the broader S&P 500 index, as readers are seeing, there appears to be no indication of any significant correction, though some investors might be looking for one. At 2,500.23, the index is enjoying a nice run up, and is now way above the 50-day MA of 2,338.50.  On trading volume wise, there is also a consistent average of about 10 to 11 billion shares trading since the start of the year.

We noted that the 14-day relative strength index (RSI) is close to the ‘Overbought’ levels of 70 with the actual reading at 67.33. The MACD index below appears to be at their peak level.

We think that these are tell-tale signs for some correction, but could not forecast the exact trigger that might cause the markets to drop significantly. Could it be North Korea firing a nuclear missile that land in the continental United States, or could there be an impeachment of the US President? We think that one of the pressing concerns is the timing of the winding-down of the Fed’s balance sheet that if not done correctly, financial markets could be badly impacted.

Moreover, the latest US data numbers, excluding the after-effects of Hurricanes Harvey and Irma, are disappointing. These include the declining trend in industrial output numbers, declining retail sales growth and the decline in the US Dollar, among others. We think that with reconstruction efforts that are currently being deployed to restore the cities in Texas, and Floirda, there could be some temporary boost to demand for vehicles, homes, and personal belongings. However, once infrastructure is restored, the level of sustainability in demand could be questioned.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of September 15, 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 80.2 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 11.1 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 Cogent Holdings Limited (up 19.7 per cent since November 2016); followed by Mapletree Logistics Trust (up 18.4 per cent since June 2017), and Nordic (up 18.4 per cent since June 2017).

The model equity portfolio did experienced a shortfall coming from Hai Leck (down 8.7 per cent since June 2017); Sembcorp Industries (down 7.3 per cent since January 2017); and Sheng Siong (shortfall of 4.5 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 September 2017.

International and Local Economic Data coming up next week

Singapore

Source: TradingEconomics.com

Trade will be much in focus for next week’s release of Singapore’s economic data. One of the key data will be exports of electronic products which could validate some of the previous positive robustness in the overall manufacturing sector, especially the electronics production.

China

The only economic data out is the overall house index which is forecasted to grow by 9.5 per cent yearly in August, compared to July’s 9.7 per cent home price increase. Investors will be looking for a good home price growth to gauge the amount of loans, and if banks have tightened their loan eligibility criteria due to the government’s crackdown on runaway home prices in the country.

United States

The US Federal Reserve is set to conduct its two-day policy meeting on Thursday, September 21. There are not many expectations of any major surprises. One of the key points to note from the meeting is the status of the US$4.5 trillion balance sheet reduction, and if the US Fed will follow through its actions.

Source: CME Group FedWatch Tool (September 15, 2017)

Have a good trading week ahead. Thank you Clients.

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About Peak Hour 87 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