Tag Archives: ST Index

Making sense out of this market

The interest in the stock market returned with a vengeance over the last 6 trading days. By Friday yesterday, it had ended at 2837, an increase of 234 points from the closing at 2603.40 on 25 February. This represented an increase of 9% on the ST index. Imagine if one were to continue to wait in hope that index tanked further, then he would have missed this rally. It may be the best rally for this year.  Thanks to this changing global sentiment, I managed to pick up some battered blue-chip stocks after the Chinese new year to add to my portfolio. This is in anticipation of additional liquidity that will come April and May when companies distribute out their year-end dividend.

The fact that stock markets all over the world were retreating in the last two months was that people were generally fearful about the world economy – the retreat of commodity prices, the collapse of crude oil prices and that the Chinese economy growth rate slowed to 6.9% was the worst in the last 25 years. Similarly, the European as well as the Japanese economies were only trudging along even with huge stimulation packages. Naturally there is a lot of pessimism over the local economy that led to a huge retreat in the ST index over the last two months in January and February.

As pointed in my book “Building Wealth Together Through Stocks”, markets tend to undershoot the pessimistic outlook (and of course it also tends to overshoot during massive optimism at the other extreme). Consequently, windows of opportunity will present themselves time and again. Take DBS for example. Six months ago, it was trading at around $20 per share, but it fell to $13 per share just recently, a drop of about 35%. In between, there were only two quarterly of reporting. Were the results that bad for the share to tank so much? I am not saying that DBS share cannot drop to $13 if it really did badly. What I am saying is that the market tends to anticipate too much before it really happens. And when things were not as bad or when there were some signs of good news, it would start to leap forward. That was exactly what I mentioned in my earlier post (Market rout: A test of our mental fortitude.) that the market is likely to roar with ferocity because the market had already dropped too much.

 

Let us examine the stock market index. About 20 years ago, if the ST Index were to reach 2500, we can safely say that it had reached its high. But today, if ST index 2600 level, it would be have been considered it as a historical low. There were only two occasions since global finance crisis in 2008/2009 that had hit below 2600, namely the euro-zone crisis in 2011 as well as after the collapse of oil prices recently. Again, it is of course possible that the ST index can go lower than 2600 and even 2500 and below, but it is important to note that stock indices represent the value of a sample of selected companies. As stock indices retreat, values of companies will emerge because market is “under-pricing” the value of companies more and more. Stock prices are driven by sentiments, and very often, the market may become so pessimistic that it starts to price themselves grossly below companies’ intrinsic value thus causing big price differences between stock values and stock prices. Consequently, when the sentiment changes, the bounce back becomes forceful. Now that this force had already pushed up the stock index significantly, perhaps the strength to push up the index further may start to weaken or even collapse going forward.

Invest carefully now.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Tackling the current uncertainties

To date, we have already completed 14 trading days in the month of February. The ST index closed 2629.11 on the last trading day of January and of today, it ended at 2660.65. In other words, ST index advanced only 30 points over that past 14 trading sessions, with almost equal number of days of rises and falls. Certainly, to predict whether the ST index is going to go up or down at this time as good as betting a head or tail in a coin-toasting game. All the bad news about commodities prices falling, tanking of crude oil prices, hiking of US interest rate and China slowdown that can lead Singapore into a long-drawn recession have been priced in the recent stock market shake-out. At this moment, the bulls and the bears are in equal force causing the situation to be in an almost stalemate position. So, whether you are a punter, trader or a long-term investor, perhaps, there is nothing exciting to brag about, except perhaps to look forward to some dividend payout dangled out by companies for being shareholders as most of the companies close the financial books in December.

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Has the market bottomed?

Frankly, I did not look into Hang Sheng or Footsie or the Dow Jones, but I think they are more or less the same story as the world financial markets become more efficient. But then, does it mean that the market has bottomed? Maybe yes, maybe no. What the market did was that it priced-in the news until now, but what about tomorrow, next week, next month or even next year? Frankly, nobody can tell with pin-point accuracy. I remember that about 20 years ago when the STI fell from its high of about 2425.70 in 31 December 1993 to 2239.60 in 31 December 1994, it actually stayed around that level for the next two years. By end 1996, the STI was 2216.80. If you think that the market had bottomed, you may be in for a rude shock. In the year that followed, it tanked 30%. By 31 December 1997 it was 1529.80. Then it tanked again by another 100% following the Asian Financial Crisis to 805.04 on 4 September 1998.

Of course, I don’t mean that the current situation will follow exactly the same pattern as it had happened 20 years ago. What I am illustrating is that stock market meltdown sometimes come in so shockingly that we simply do not know how to react.

Can we really able to buy at the bottom?

In a similar way, we are also somewhat influenced by the pessimistic sentiment around us as market falls. It is generally fair to say that our decisions can be highly influenced by the market sentiments. When the market hits its low, we tend to procrastinate in hope for the market to tank further even though we know that stocks have become cheap. During one of the courses that I conducted somewhere in April 2013, one student pointed out to me that he wanted to wait for the market to hit low before he goes in with “big amount of money”. He also told me that he had not been investing all this while. My point to him was, he might probably not able to see where really the bottom is. Especially, when the market advanced two-days for every two days of drop, it is hardly possible to see where the bottom is. By the time, one knew where bottom was, it might have already passed the market trough. So, at end of the day, it is important to invest regularly in small quantities to smoothen out the financial shocks that time and again surfaced. It applies to shares, unit trusts and ETFS, a technique that fund managers called as dollar cost averaging. Sure, as we increase the frequency of purchase, the brokerage charges can unconsciously increase, but do remember that it can more than offset by the lower price that we pay for the shares as the share prices fall. So, it always makes sense if we make small purchases in times of extreme uncertainty. After all, we do not know how long this market brawl is going to last even though we seemed to be in a period of lull right now.

 

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.