Short term bull, long term bear

Last friday, the STI closed at 1829.71 points. Within 1 week, it went up 5.15% from around 1740 points. The picture on the right shows that the STI has breached the 50 day moving average ever since it went below that line in June 2008. This indicates a short term bullishness in the market right now. I expect the STI to go higher in the next few weeks and the reasons are as follows:

1) The Obama factor – This will be a change welcomed by all. Obama will take office in January 2009 and he has already assembled a group of very credible people to help him. The good news that most americans will be looking forward to is the stimulus package he will be announcing. I believed that the rescue package is not empty talk and it will most likely be the catalyst to kick start the economy which is under intensive care unit for the past months. What started off as a $350bn package has now ballooned to $600bn, and now its likely to top $1 trillion. Whether the $1 trillion is enough remains to be seen.

2) The fear factor has decreased - Most of the bad news have been announced and the peak of pessimism has passed. I would say the worst part was the period in Sept & Oct 08 when Lehman collapsed and AIG almost went under. The fear has somewhat subsided as governments around the world have signalled their willingness to inject cash to stimulate the economy and to bailout large companies in distress regardless of industry. The Chicago Board Options Exchange Volatility Index, reached a low of 39.61 on Wednesday, a level unseen since 2nd Oct 2008. The VIX, based on a number of index options, shows the market's expectations for volatility over a 30 day period.

Even though things are beginning to look brighter, I believe it is still too early to go long on stocks. Why?

1) Low volume in market - For those technical investors, its generally accepted that anything that goes up too quickly on low volume is not sustainable.

2) More bankruptcies and job cuts on the way - The IMF has predicted that 2009 will bring slower growth in emerging countries and negative growth in the UK, Europe and USA. Dont think that just because we did not see any news announcement, everything is well. Many small and medium companies are closing and employees laid off. This trend will continue for most part of 2009.

3) Lousy earnings outlook - Most companies will announce their financial report in Feb 2009. The earnings for fiscal year 2008 will be dragged down by the poor and difficult business conditions in the second half of the year. A lot of stocks are trading at a P/E level of below 10 in the SGX. If you think that the second half of 2008 is a bad dream for earnings, then be prepared for a nightmare in first half 2009. A lot of stocks are trading at a historical P/E level of below 10 in the SGX. However, when a 50% decrease of earnings take place, the P/E can easily double and the price no longer seem attractive.