Published May 12, 2009

Rally takes breather, but will it resume?

By R SIVANITHY

	Email this article
	Print article
	Feedback

(SINGAPORE) How sustainable is the US recovery that equity market investors appear to be buying into so heavily?

In Singapore, before the Straits Times Index dropped 72.11 points or 3.2 per cent yesterday to 2,166.10, after having surged an astonishing 780 points since closing at 1,456.95 on March 9 - a 53 per cent gain in about eight weeks which, according to conventional wisdom, was driven by optimism that the US economy has bottomed.

In Hong Kong, the equivalent gain for the Hang Seng Index before its 1.7 per cent loss yesterday was also 53 per cent, while the Dow Jones Industrial Average's rise between March 9 and Friday last week was about 2,000 points or 31 per cent to 8,574.

Clearly, investors have bought heavily into the 'green shoots' theory - glimmers of hope that the worst is over. This theory stems from recent US manufacturing, housing and employment data that showed a slowdown in the rate of contraction in March/April. In addition, the results of recent US bank-stress tests were not as bad as expected, adding to an overall sense of relief and optimism.

Fund manager Capital Dynamics, for example, said yesterday that it believes the global economy is on course for a 'V-shaped' synchronised recovery and that stock markets are already undergoing a major bullish reversal. It also believes the present bounce in equities is not a bear market rally, and that it will be sustained by 'institutional lemmings still loaded with cash and banking giants that have too much hoarded liquidity'.

However, US newspaper Barron's reported recently that although 60 per cent of 100 US money managers it polled are bullish or very bullish on the US stock market, 58 per cent also believe US stocks have not bottomed yet, and 74 per cent believe the US government will have to produce a second stimulus plan because the present package is insufficient.

Bank of America-Merrill Lynch (BAML), in an economic commentary entitled 'Shooting the shoots', said that most of its clients have not participated in Wall Street's rally - leading it to believe that big-money investors have largely stayed on the sidelines.

'By and large, this rally has been a clear technical event - gaps get filled quickly and the primary source of buying power seems to be coming from a huge short-squeeze,' said BAML, which also looked at short-selling data provided by the New York Stock Exchange.

It pointed out that there were four of such rallies from 1929 to 1932, a half-dozen in the 19-year Japanese bear phase and 'no fewer than 40,000 rally points in the Nasdaq that were fun to play in the 2000-2003 bear market - but the fundamental downtrend was obviously still intact'.

BAML also noted that historically, it has taken four years for the economy to work through the negative effects of a collapse in credit and asset values.

Phillip Securities Research said in a recent report that although market action indicates a V-shaped economic recovery, collective wisdom can descend into 'lemming behaviour' motivated by greed and fear. It believes the market is presently driven by fear of missing out - more than by fundamentals - and retains its view for a 'flat W' or 'L' recovery for the US economy.

Yesterday's loss was the STI's biggest one-day fall since it plunged 72.52 points to 1,673.14 on March 30. The index spent the entire session tracking Hong Kong's Hang Seng Index, which in turn could have been influenced by a 90-point loss for the June futures contract on the Dow Jones Industrial Average, suggesting a weak Monday for Wall Street.