STI ‘WannaCry’ Out Loud

This week marks the 50th anniversary of the creation of the Straits Times Index (STI), and what a better way to mark the week with the biggest global computer hacking crime that attempts to wipe out many computer networks across the globe, and STI is currently hovering around 3,200 to 3,300 levels. The index has achieved quite an astronomical run from 100 when the STI was first created on December 31, 1966.

Back to the computer virus that seeks to turn the global networks upside down. The ‘WannaCry’ computer virus first started its wave of infections on computer networks across the United Kingdom, and Europe last Friday, May 12, 2017. It then spread across globally. Singapore, being an open economy, was so far spared of the crisis, except for some isolated infections, namely the panel displays in Tiong Bahru Plaza, and White Sands Shopping Centre in Pasir Ris. Apart from these incidents, the nation’s Cyber Security Agency (CSA) and SingCert has not reported any malicious intrusions to the local networks. However, extra vigilance has been stepped up to combat the attack.

However, despite the run-up of technology stocks in the US, especially the cybersecurity companies, like Cisco (CSCO), and Symantec (SYMC) which saw their stocks climbed overnight as a result of the news reports, the local FTSE ST Technology Index is still lagging behind as shown in the diagram below:

Note: One-year daily chart of FTSE ST Technology Index (May 16 2017)

Taking a look at the one-year price volatility of FTSE ST Technology Index, we noted that the index has fallen below the various technical benchmarks including the 50-day, 100-day, and 200-day moving averages (MA). The major low was 213.51 and at 216.25 as of May 16, it is heading closer to the major lows. Based on the peak-to-trough percentage decline, the drop has been approximately 28.7 per cent.

The trade-off between US cyber stocks and the FTSE ST Technology Index

Note: One-year charts of FTSE ST Technology Index and Purefunds CSE Cyber ETF (HACK) (May 17, 2017)

Looking at the contrast between the FTSE ST Technology Index and the HACK ETF, we noted that HACK ETF has been riding upwards on the rave about cyber security related stocks in light on the ‘WannaCry’ computer virus, and the potential demand for cyber security solutions.

 How did STI perform so far

Note: One-year daily stock chart of STI (May 16, 2017)

The Straits Times Index (STI) has so far achieved a phenomenal run up this year, and is up by 12 per cent, but on Tuesday, May 16, STI lost ground by about 36.5 points or 1.1 per cent from Monday to close at 3,227.71. The total volume of securities traded on May 16 was about 2.26 billion, and was relatively unchanged from Monday’s trading volume of 2.78 billion.

Looking in depth at the one-year daily chart above, we noted that STI is way above the 100 per cent line on the Fibonacci Retracement Line. The STI has climbed from a low of 2,703.48 in late June 2016 to reach a high of 3,275.39 recently. The trough-to-peak gain is around 21.2 per cent increase.

The 14-day relative strength index (RSI) (not shown) showed quite a sharp drop to 57.39 from an average of 65 to 70. The 70 level marks the ‘Overbought’ level, while 30 marks the ‘Oversold’ level.

The STI chart looks toppish, and we believe that it has gone up quite significantly especially with the 21 per cent rise from the bottom. It will be a testing of holding power for investors who are thinking of taking advantage of potential profit taking opportunities.

Noble Group has the biggest roller-coaster ride this week

Noble Group has been the one of the major small-cap stocks that have seen lots of gyrations. When it announced its 10 for one stock consolidation, the stock closed $1.27 on Friday, May 05. But, it soon gained traction on Monday, May 08, when it rose as high as $1.36. However, come Monday, May 15, the stock tank again as analysts were quite doubtful about its overall financial situation, and most of them are questioning management’s stance they would be profitable by 2018-2019. Management is also not directly answering any questions regarding their going concern status, and it maintains that they are currently in strategic talks with a unnamed strategic investor. Many are speculating that it could be China’s state-owned Sinochem Group.

Note: One-year daily chart of Noble Group (May 17, 2017)

How should investors react to all the selling going on

With what is going on with the global markets environment, the ‘WannaCry’ computer virus, and knee jerk reactions among many investors when it comes to hitting the ‘Sell’ button, we think that it might be too soon to call the bottom. If we were to take a look at the STI, it is approximately close to the one-year anniversary of the so-called ‘bull run’, and so far there has been two occasions this year (March and April) that the STI has crossed below the 50-day moving average (MA).

Note: One-year daily chart of the Straits Times Index (Red arrows pointing occasions where STI went below the 50-day moving averages

The correction we are seeing today is healthy overall. We think that the index is due for correction given its relatively high forward price-earnings of close to 14 to 17 times. We might be looking more favourably at STI component stocks when the index starts straddling between the 100-day MA, and 200-day MA of 3,173.85, and 3,101.22 range respectively.

How did Hong Kong markets perform

The Hong Kong’s Hang Seng Index (HSI) is still performing relatively strong with the rise of about 18.3 per cent from trough-to-peak. The index closed Wednesday, May 18, 2017 trading at 25,293.63 and is down by a mere 0.16 per cent from the previous session. We think the Hong Kong markets continued to be supported by capital inflows from Mainland China after the massive crackdown on markets on the Mainland.

Note: One-year daily chart of Hang Seng Index (May 17, 2017)

The Hong Kong market action yesterday (May 17) was mostly dominated by technology-related earnings news, namely Tencent Holdings Ltd, and Alibaba Health with both companies reported higher than expected earnings. Tencent is trading at 262.80 Hong Kong Dollars, up by 1.2 per cent intraday as the article is written on May 18. However, Alibaba Health traded south by 2.8 per cent at HKD 3.43 on May 18.

European markets seeing some mild correction

Source: Stockcharts.com (One-year daily chart of Euro Stoxx 50 index as of May 17, 2017)

Looking at the one-year chart of EuroStoxx 50 as a benchmark for the top 50 so-called ‘blue chip’ European companies like Siemens and Unilever among others, we noted that the index has not faced any major corrections since the start of 2017. It is quite a major feat considering about local STI has faced some period of minor corrections when the index took a slight dip below the 50-day MA two times in April and May.

Looking at the economics of the region, the annual Gross Domestic Product (GDP) growth rate is around 1.7 per cent as of the March 2017 quarter, and inflation rate is about 1.9 per cent as of April. Core inflation has also risen to 1.2 per cent in April, as compared to 0.7 per cent in March.

Another example is Germany which is the largest European economy. It grew by 0.6 per cent in 1Q2017 driven by investment in construction, machinery, and equipment. Household spending and state spending has also driven up the German economy. As the country’s electorate is heading to the polls in September, the performance of the economy will be tested.

However, not all are said to be rosy especially when troubled European economies like Greece are now facing tough choices in trying to get its electorate to adopt tough austerity measures. The Greek government is also negotiating with lenders to work out a debt package that is fair for all parties concerned. However, the lenders are agreeable if Greece can adopt new reforms, shore up its finances, and accept the terms of the debt workout plan. According to a Reuters.com article, Greece has received €260 billion in bailout aid since 2010 in exchange for reforms and deep spending cuts. However, this has caused the country to go into recession, and its debt has ballooned to 179 per cent of GDP despite the 2012 haircut.

Aside from such debt woes facing Greece, the Euro Area appeared to be doing fine, and fund managers are increasingly turning their sights on the regional stocks. Currently, based on forward price earnings multiple, the EuroStoxx 50 index is trading on a 12 to 13 times multiple, while France’s CAC, and Germany’s DAX stock indices are also trading within similar multiple ranges. This compares to the forward P/E multiple for S&P 500 in the US which is around 15 to 16 times. By comparison, it is reasonably conclusive that major European stocks are trading at much lower valuations as compared to their counterparts in the United States.  The European stock indices are also trading much lower valuation multiples as compared to the other world indices. For example, the Morgan Stanley Capital International (MSCI) World index is currently trading around 15 to 16 times on a forward basis.

US markets still going strong despite mid-week correction

Despite the political drama, including accusations back and forth on inappropriate disclosures of classified intelligence data to Russian officals, and firing of former FBI director, James Comey last week, the US financial markets managed to eke out some gains by end of the week, with the S&P 500 Index  gaining around 0.7 per cent on Friday, May 19 to close at 2,381.73. However, for the week, the index closed lower. A summary of the US markets trading at the close of Friday’s trading session is as follows:

Source: CNBC.com

Looking at the S&P 500 charts

Source: Stockcharts.com (One-year daily chart of S&P 500 Index, May 19, 2017)

If one may noticed on the one-year daily chart of S&P 500 Index, this is the second time since the start of the year that the index dipped below the 50-day MA, and immediately, there was a sling shot back up towards the end of the week. The first dip happened in April when the index took about two weeks to move back up above the 50-day MA. The question is whether on a short-term basis, the index will resume its upward move, or is this a temporary bounce-up, aka ‘Dead Cat’ bounce-up?

For more confirmation of whether volatility did make a comeback from a low of 9 to 10 last week, we pulled up the VIX Index or ‘Fear’ Gauge to determine whether investors are anticipating a further decline in the US stock markets.

Source: Stockcharts.com (One-year daily VIX Index fluctuations, May 20 2017)

We noted that the volatility index (VIX) index did spike up to as much as 15.5 to 16.0 before backing down to close at 12.04 on Friday. We also noted that the 14-day relative strength index (RSI) is trading around 50, and there is no difference in the volatility levels as compared to the 14-day RSI of S&P 500 Index that was displayed earlier.

With the reporting season almost done for 1QFY2017, the electorate is now increasingly focused on Washington politics, and with the political drama unfolding, many investors got distracted by the political drama. We think that if such distractions were to continue down the road, the next few months could be volatile for the US markets. This week’s market action could be the start of greater uncertainties and more roller-coaster rides for the major US stock indices.

How did our investment model portfolio perform

Note: Our investment model portfolio (May 19, 2017)

Our investment model portfolio has gotten a 9.9 per cent return (including dividends) since its inception at the end of November 2016. By comparison, with the Straits Times Index (STI) ending the week at 3,221.66 on Friday, May 19, the return is 10.9 per cent during the same period. Our major standout stock is PNE Industries which gained about 22.4 per cent since we put the stock on at the end of last year. This is followed by Dairy Farm which gave us a total return (including dividends) of 20.1 per cent since the end of last year as well.

Our sole laggard stock is ISOTeam which lost 6.3 per cent since we put on the stock at the end of March 2017. However, we think that the company continues to hold some potential in the area of town council and HDB estate renewal contracts.

On our watchlist, we are on a lookout for oil and gas (O&G) firms which present good value opportunities, and strong cash flows. We are still keeping an eye on Keppel Corporation, Ezion, Boustead, Hai Leck, Mermaid Martime, Hiap Seng Engineering, PEC Corp, and Nordic Group. We think that with the O&G sector, we will be selective on stocks that have strong balance sheets, good fundamentals, and most importantly, strong positive free cash flows.

What events to lookout for in the coming week

With earnings season that is approaching close to the tail-end, local economic data releases will take the centrestage with inflation rate data on Tuesday, May 23, followed by Thursday, May 25 release of the final 1Q GDP growth rate. Most economists are expecting the overall inflation rate to stay range bound at 0.7 per cent to 0.8 per cent, and core inflation rate to be 1.2 per cent to 1.3 per cent.

As for the final reading on 1Q GDP growth rate, most economists are expecting growth of about 2.7 per cent to 2.9 per cent, and this is in part driven by manufacturing growth we’ve seen for a couple of months since the start of 2017.

The April industrial production, another key data will be released on Friday, May 26. Economists are forecasting a growth rate of 8.1 per cent after a major run-up of 10.2 per cent in March.

Over in the United States, various economic data releases including existing home sales, the second estimate of the 1Q GDP report, personal consumption expenditure (PCE) prices, and a couple of US Federal Reserve committee members will also be speaking. Another key data to watch is the Federal Open Market Committee (FOMC) minutes which will be released on Thursday, May 25. The minutes are notably one of the most followed report that seeks to determine the guidance from the central bank on the interest rate decision for in the coming months. The Fed has already guided for two more rate hikes this year, and Fed Fund futures are now pointing towards a 78.5 per cent probability of a 100 to 125 basis points (bps) rate hike on June 14 when the FOMC meets.

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. 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.