Three stages of Singapore's bear market

I believe that aside from liquidity, sentiment is a key driver of stock markets. A few posts earlier, I wrote about the the three distinct phases of a bear market. I found a well written article which describes the idea that I probably stumbled upon while reading finance literature. It says that the denial, concern and capitulation are the three stages of a bear market and it defines capitulation as:

"At this point the market may rally again as many observers feel that the decline has ended and that a new bull market has begun. This rally, also characterized by weak breadth and low volume, subsequently fails and heads down. At this point the majority becomes exceedingly bearish and throws in the towel, fearful of further declines and the potential disappearance of their assets. This is the capitulation phase, when stocks are sold on fear and emotion rather than on rational analysis. It is at that point that the market is finally ready to make an important bottom."

I have called 21 January 2016 a the bottom of the market in my recent post. Some have told me that it is too early to call or too risky to time the market. However, I believe that we capitulated. My own capitulation came on the last week of January when I received news from my company regarding the state of affairs for 2016. I believe that we are entering a recovery phase that started with somewhat a bang. A bull market does not announce itself but this is just the initial recovery stage. Interestingly, I came across a blog post which said that when the market is at the lowest and thus the best time for investment, it is also a time when you may lack the ability to invest because you might have lost your job or not received a good bonus!

I am writing this in response to an article that talked about people's fears of missing out or FOMO. I initially thought it meant the fed's open market operation. As long as there is FOMO, I think the market will be on the path to recovery, speed notwithstanding. The bull market needs to climb the proverbial wall of worry. Other walls of worry I expect the market to climb would be the American Presidential elections. Suddenly, concerns about ISIS has taken a back seat to the race to the White House.

If you do have any way of measuring sentiment, do share. It will be useful in refining my sense of an already abstract indicator. My next major alert is when the market starts to get a little too frothy.

Are we missing out on the recovery in the Singapore stock market?

In my 16 January post, I mentioned that I expect the market to hit a bottom between February and October 2016, with the bottom to be around 2,200-2,400. The market has recently touched the 2,700 mark (2 March 2016). It could be that we have reached the end of the third phase of the bear market, with 21 January being the end of that phase and the bottom of the market. A silent recovery could be quietly taking place. Or it could be the calm before the storm, when the market does plunge to 2,200-2,400.

My take is that we have probably (75% +/- 12%) past the market bottom. A lot of China money is recently entering the market after efforts by the PBOC to cut rates. This is has the knoock-on effect of reinjecting liquidity into local markets but might not be sustainable for China.

My personal approach will be to wait one to two weeks before deciding to enter market, looking out for market drops to enter the market. If the market can stay above 2,700 for more than 2 weeks, it is probably recovering quietly. There is limited downside from current levels to 2,200, if it indeed a calm before the storm scenario. I still shun oil and gas stocks, preferring companies that have have taken a beating but have good business fundamentals.

Why Singaporeans should not cheer for negative Japanese interest rates?

The Straits Times Index jumped by more than 2% on the last trading day of January after the Japanese central bank announced that a key interest rate would be made negative. Despite this intervention and same-day reaction, I am sticking to my prediction that there will be a tumble to 2,200-2,400 levels before recovery because other central banks have used the same negative interest rate policy with little effect on the stock market. I believe the Japanese central bank's intention is to weaken the Yen than stimulate the stock market.

If anything, that last day jump means we are closer to that last phase of the bear market, where the mood of the market turns from surprise/disbelief into despair. This is because, to steal a movie quote, there can be no true despair, without hope. Japan's central bank intervention represents that hope before the STI tumbles into 2,200-2,400 levels. A quiet recovery, not noticeable by many until after the fact (2-3 months out) will ensue after true despair has set in.

Meanwhile, I have been trawling through blogs, valuebuddies and sharejunction for ideas on which stock to pick up. SingPost remains on my watchlist but I have added Riverstone and NSL and Lee Metal Group for future considerations. The temptation to average down on KrisEnergy however, has become very strong.

Straits Times Index Bear Market into 9 months, Sharp Plunge Ahead

If we took April 2015 as the peak and end of the bull market, we are now entering the ninth month that the market has trended down. This is essentially a bear market. As I have written in my previous post, I argued that there has been two distinct phases in the bear market and that there will be one more phase. This is the phase where there will be sharply declines but the mood of the market turns from surprise/disbelief into despair. This is also where the market starts to recover.

I have made some predictions for the first three months of the year and I have been spot on so far. And if history is any indicator, on average, we should see an inflection between one and nine months time or between February and October 2016. In the last financial crisis, the STI was at its lowest around 1,600 points at one level. My opinion is that we will almost certainly (93% +/-6%) not hit sub-2,000 like in the GFC.

Singapore Stock Market Outlook 2016

Those viewing my blog on a desktop version will see my latest prediction for the coming year. For the benefit of readers viewing my posts on their smartphones, the below is my market outlook as of 31 December 2015.

Singapore Stock Market 2016 Outlook

3 Month Outlook: The market will decline sharply (more than 6% decline from peak to trough) and will probably (75% chance, +/-12%) touch 2,600 levels.

3+3 Month Outlook: Market will decline (3% from peak to trough) or have (volatile day-to-day swings of +/-1.5%) sharp swings.

6+6 Month Outlook: Market will embark on a slow recovery (start of the right side of the "V"), likely to end the year at 2,900 level +/- 50 points.

Notes:

3 refers to the immediate following three months

3+3 refers to the 3 months period after the first three months

6+6 refers to the 6 months period after the first six months

Please do your due diligence. I am only a blogger. The aim of the predictions is just to share with your my sentiment of the market using more precise language. This will allow me to test my predictions. It will be updated on an as and when basis, but at least every 3 months.

The 4 predictions I made in 2015 and how it saved your portfolio

In the close to 40 posts in 2015, five of them had predictions about the market:

Jan 2015: "2015 will be a good time to buy stocks, when Brent oil price hits USD 45 per barrel"

3/4 wrong but if your entry point was when Brent hit USD 45 per barrel, there should be upside.

Straits Times Index: Will MERS cause STI to do a SARS?

On 20 May, South Korea reported the first case of MERS in the country and since then it has spread throughout Asia with Thailand being the latest country to be affected. Singapore’s Lee Hsien Loong has also warned that it is inevitable that MERS “will reach our shores”.

To see if there are any clues how the stock market has and will perform in a period of highly infectious disease, I have in the above chart, superimposed the STI on the corresponding trading day that Singapore reported its first SARScase (1 March 2003) with the trading day when South Korea reported its first MERS case (20 May 2015). Based on 2003 historical trends, I have projected that period’s performance onto the closing STI on 19 June 2015 to create a forecast.

For the 60 trading days before MERS was reported in South Korea, the STI performed in a volatile and mostly positive manner. When news of MERS in South Korea broke out, the index was rather unmoved but has been on a downwards trend since then.

For the corresponding period in 2003, the STI was similarly volatile but in a negative manner. When SARS broke out in Singapore, the index suffered a same day plunge but quickly recovered. It then fell for the next 20 trading days before staging a broad market recovery.

Judging by the immediate trading days before SARS, should MERS hit Singapore, we can expect the STI to plunge rather sharply. However, the market is expected to rebound short-term. However, unlike in 2003, I caution against expecting a longer term recovery because that 2003 period coincided with one of the greatest secular bull markets of our time.

Therefore, the verdict therefore is that you should look at the bigger picture. MERS will benefit day-traders as it provide the catalyst for short-term massive fluctuations as fear initially permeates and sets in. After a while, this information should be priced into the market, with broader factors dictating its longer-term movement.

Fear of heights: Reviewing my 2014 forecast

Financial bloggers like to make predictions because their followers like to read them.

Since it is almost free, I decided to gaze into the crystal ball made the following prediction on 18 Jan 2014:

3 Month Outlook: Bear market and volatility
6 Month Outlook: Bear market and volatility
12 Month Outlook: Recovery

Based on the chart below, I got the 3 month outlook partially right. The market was volatile from January to April 2014, with two corrections but it ended higher overall. 

I got the 6 months outlook wrong. It was pretty much a bullish recovery after early February, if you look at the January to July 2014 period. 

However, I got the overall trend right for the full 12 months. That said, from July 2014 to January 2015, the market was very volatile, with at least 4-5 dips.

Looking ahead, I managed to get the 3 month outlook for my latest forecast right and I expect the bull market to continue until the end of the year.