Off to a 3Q2017 staggering start for STI

Another quarter ended, and this week is the start of the first week of a new quarter, with six more months to go till end of year 2017. However, the Straits Times Index (STI) appeared to stagger itself to stage any significant spurt to the top. As this article is being written, the STI is consolidating itself at around 3,200 to 3,220 levels with no indications of any major run-up.

Note: One-year daily prices of Straits Times Index (STI) (July 07, 2017)

We note that the 14-day relative strength index (RSI) is trending downwards and is now around the 40s level. The RSI is separated by the ‘Overbought’ level at 70, and ‘Oversold’ level at 30. There are some stocks that have been in focus, namely Noble shares, and the overall technology sector which suffered some brunt coming from overnight technology share losses on the US Nasdaq Index.

Noble shares spike and traders are encircling the name

Note: One-year daily share price of Noble Group Ltd (July 07, 2017)

We note that there was a short-term spike on Thursday, July 06 when the stock rose from $0.45 to a high of $0.65 per share. The trading volume is also quite heavy on Friday, July 07 when there are about 36 million shares traded with half an hour to the market close.

Readers might want to recall that on June 22, an Abu Dhabi, United Arab Emirates (UAE) fund by the name of Goldilocks Investment Co. built up a five per cent stake over two days causing the stock price to rally in Singapore. In a Bloomberg report, it was noted that Goldilocks Investment accumulated a 5 per cent stake over two days, equivalent to 50.5 million shares on June 20, after buying a 15.5 million stake before.

It was also noted in the Bloomberg report that Goldilocks is controlled by investor Jassim Alseddiqi through his Abu Dhabi Financial Group. It started the US$200 million fund in 2016, and one of its investment mandate is undervalued opportunities in six Gulf Cooperation Council (GCC) countries.

When queried by Singapore Exchange (SGX) after an unusual trading activity on the stock, Noble replied saying that it is not aware of any other possible explanation for the unusual trading. However, many traders thought that Goldilocks might be accumulating more Noble stocks.

If readers might recall my previous take on Noble, I would only reiterate that the stock is a speculative trade and not to be purchased like a ‘Buy and Hold’ investment. The fluidity of the various news stories move the stock wildly and is difficult to explain the fundamentals of the stock. It is also a favourite stock to trade for many speculators, and investors need to evaluate whether such investments provide any additional value-add to the investment portfolios.

Technology stocks starting to rise

With the main SDPR Technology Select Exchange Traded Fund (ETF) (XLK) broken down below the 50-day moving average (MA) this week, the ST FTSE Technology Index is on a cusp of an uptrend from the lows of 212.92 in mid-May. On Friday, July 07, the index stood at 237.36, and was slightly down from 239.5 on the previous day.

Note: One-year daily chart of FTSE ST Technology Index (July 07, 2017)

Looking at the above chart, we noted that there has been a turn towards the upside. However, with the widespread cautiousness over the valuations of technology sector, we think that it does pay to watch closely on various technology names like Hi-P, Sunningdale Tech, UMS, and Venture Manufacturing, among others.

We also noted that the 14-day RSI is still veering close to the ‘Overbought’ region at 70, and it is believed that the rising uptrends have outrun the fundamentals. Though there is a general view that the interest among Internet of Things (IoT), robotics, artificial intelligence, and autonomous vehicles have driven interest and demand for semiconductor chips, electronic components, and other ancillary products, we think that it also does pay to watch how economic data like electronics manufacturing output, shipments, orders outlooks play out over the next six months. There have been market news features reporting that the technology-related output might slow down, and this might have caused many investors to feel a bit cautious.

Hong Kong’s Hang Seng Index (HSI) took a negative turn lately

Note: One-year daily chart of Hang Seng Index (HSI) (July 08, 2017)

Looking at the chart above, the Hang Seng Index (HSI) broke through below the 50-day, and 100-day moving average (MA) after reaching an all-time high of 26,090.33 in early June. We note that at the end of last trading day for 2Q2017, the HSI closed at 25,764.58, which was just touching the 50-day MA line. However, on July 04, HSI took a steep dive of about 200 points to close at 25,389.01. The reason for a significant plunge in the HSI on that day was due to valuation concerns, and some negative comments around its popular online game products, and general cautiousness over several technology stock valuations.

On Friday, July 07, the HSI fell further by 124.37 points to close off the trading week at 25,340.85, thus dragging down the index further from the previous uptrend momentum. Overall, for the week, HSI is down 1.6 per cent. One of the causes for Friday’s slump was concern over potential slowdown in the Chinese economy in 2H2017, and global monetary tightening following hawkish tones from the latest US Federal Reserve’s release of its minutes from the June meeting.

In addition, many investors were concerned over the valuations of several technological companies like Tencent, and Baidu. The 200 point drop on Tuesday (July 4) was also partly impacted by investor concerns over valuations among firms in the technological sector.

According to Reuters.com and Chinese Securities Journal, net flows from Mainland Chinese investors via the ‘Connect’ schemes fell by more than half in June, sparking questions over the sustainability of the present uptrend in the HSI. If such inflows are eliminated, we think that there could be no support for HSI, and investors could stay away from the markets until attractive valuations come by.

Source: Stockcharts.com (One-year daily chart of EuroStoxx 600 Index as of July 08, 2017)

Taking a look at the chart above, we noted that the index is heavily sold down since the end of last month. So far, there appears to be no end to the relentless selling with the 14-day RSI veering close to the ‘Oversold’ level of 30.

European markets have been hit hard since last week about European Central Bank (ECB) President, Mario Draghi giving pre-empt indications about ending the ongoing qualitative easing (QE) programme. Apparently, it did not end well among some investors due to the impending removal of QE.

Going forward, it appeared that the Euro Stoxx 600 Index might not be done with all the ongoing selling. Investors are concerned about the global central banks’ actions, and are not looking at the bigger picture of economic recovery due to policy normalisation. It takes time, and meanwhile, investors are urged to stay calm, and not panic.

US markets continue to climb further after robust jobs report

The US financial markets got a bit of uplift with the release of the latest payroll numbers of the month of June. The latest jobs report showed US employers adding 222,000 new jobs, while the unemployment rate ticked up slightly higher at 4.4 per cent from 4.3 per cent. The latest job figures were enough to jolt the markets higher with the major US stock indices, including the Dow Jones Industrial Average (DJIA), S&P 500 Index, and the Nasdaq Composite Index moving higher, thus recouping of what was lost a day earlier when technology stocks got hammered badly over valuation concerns.

Source: CNBC.com

Digging deeper into the jobs report, there were some disappointing indicators namely wage growth which rose by 0.2 per cent to US$26.25 per hour in June, below analyst expectations of 0.3 per cent. This has also resulted in the overall wage growth over the past twelve months to rise by 2.5 per cent and is still below the usual gains in the current cycle of expansion.

However, despite the slight miss in wage data, the US Federal Reserve is poised to raise interest rates. The present indications of Federal Funds Futures data showing a 96.9 per cent probability that interest rates might be raised by another 100 to 125 basis points (bps) in the upcoming Federal Reserve Open Market Committee (FOMC) meeting on July 26.

Aside from economic data, the earnings season officially begin next week as all the major US banks start reporting their earnings, and there are indications that the pace of earnings for the overall S&P 500 member companies will likely rise by 10 per cent or more. With a subdued wage growth environment, there are expectations that S&P 500 company earnings could see another leg up.

Source: Stockcharts.com (One-year daily chart of S&P 500 index (July 07, 2017))

Looking at the above one-year chart of the S&P 500 Index, we noted that though there has been a slight dip towards the 50-day MA at 2,414.29, the 14-day RSI continues to remain quite neutral at around 40 to 50. The overall trend is still heading upwards, albeit minor corrections along the way.

We expect when next week’s earnings season begins, some recovery in the overall market outlooks could occur. We do expect some volatility as the latest Volatility Index (VIX) did climb up a bit from its lows of around 9 to 10. It ended the trading week with a reading of 11.19.

Performance of our model investment portfolio

Note: My model investment portfolio (July 09, 2017)

The above model portfolio performance spreadsheet shows my latest positions as of July 07, 2017. On June 30, 2017, I have completed my quarterly rebalancing, and sold of the three local bank stocks (DBS, OCBC, and UOB). I have also sold off Venture Manufacturing, ISOTeam, Dairy Farm, PNE Industries for a total profit/proceeds of S$83,500.

In replacement of the stocks that are being sold or rebalanced, I have included Hai Leck, Nordic, CapitaLand, Soilbuild Business Space Reit, Sheng Shiong, Ascott Reit and Straits Trading Company. As some readers might have followed my blog articles, Hai Leck, and Nordic are some of the names that regularly came up. I incorporated these businesses into the portfolio on the belief that they capture a broad segment of customers, and comprise of different sectors ranging from oil and gas (O&G), Reits, grocery business, and hospitality business. I am also putting my bets on the property sector as there is general market expectation that the sector could be beneficiaries from the recent gradual turnaround in the sector. I chose CapitaLand, and Straits Trading Company as potential beneficiaries of the growth.

For the realisation of my investments in the previous portfolio, the overall return rose sharply to a whopping 85.7 per cent since inception at the end of November 2016. In comparison, the Straits Times Index (STI) rose by 11 per cent during the same period.

I will actively monitor the portfolio. So, readers, do regularly tune into my portfolio picks.

Market events in the coming week

The local earnings season kicks off in the coming week with SPH Reit (July 12), ESR Reit (formerly Cambridge Industrial Reit) (July 13) and Soilbuild Business Reit (July 13)  reporting their earnings.

As for local economic updates, Singapore’s latest retail sales data (July 12), advanced GDP (July 12), and new property development sales for the month of June (July 12). On the international front, the US Federal Reserve Chairperson, Janet Yellen will provide her semi-annual monetary policy testimony (Humphrey Hawkins Testimony) to both houses of the Congress on July 12.

Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. These views do not necessarily represent the views shared by my principal firm. Investors seeking to trade in the stocks mentioned in this article are advised to seek the opinions from licensed financial advisers.

This article is written by Tay Hock Meng (Peak Hour), a licensed financial advisory consultant, and trading representative. For a free financial health check/discussion, please contact taysg76@gmail.com, or +(65)9721 3987.

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About Peak Hour 87 Articles
I am in my mid-to-late 40s, married, and am thankful for my wife for all the things she has done. We do not plan to have kids, but are blessed with the simple lifestyle that we truly cherished with each other. I used to be from the financial services industry, having spent 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. I am currently working as a market analyst with a Singapore-based agrochemicals company. I have a deep interest in equities trading/research and analysis, data analytics, real estate, REITs, forex, and digital currencies. I don't consider myself as an avid writer, but I hope to learn as much possible. I am a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. I hope to complete my CFA examinations within the next five years. I value all the feedback provided by fellow readers and bloggers. Please provide any feedback on the work I did. Thank you readers.