Recent STI Index

STI tested 3000-3050 support zone and poised to recover back to 3100-3150.

The market is unlikely to sustain any downtrend all the way below 3000 to 2900 or 2800 during the current earnings season without making significant rebounds as the macro picture has not deteriorated.

At this stage the market is not reacting too negatively to the same old bearish views that the worst of the sub-prime is still to come and that the US is headed for the worst economic and financial woes since the oil crisis of the 70s or even since WW2 or the Great Depression of the 30s.

Even the likes of Ben Bernanke and Alan Greenspan have acknowledged that the balance sheets of US corporations are sound with strong cash positions and that the real economy “appears to be reasonably good” which implies that core corporate earnings should underpin the market in the event of more sub-prime related credit losses.

After the first quarter market turmoil, analysts too have become increasingly cautious in earnings forecasts which should help to mitigate any investor disappointments during this latest reporting season.

Having seen the STI plunged some 28% from its 3831 peak to 2746, with the 2750-2800 area well-defended after being tested 3 to 4 times, there is less fear of a major crack of this support level anytime soon.

Although the future remains bleak the market has a way of adapting itself to bearish situations always trying to discount them quickly and try to read the fundamental picture 6 to 9 months going forward.

Thus even if the credit losses reach the US$945b IMF figure or $1.2tr Goldman Sachs estimate, Wall Street’s reaction may not be worse than it had been in q1 which had seen the Dow plunged to below 12000 to around 11600.

Investors have been encouraged by the consistent rebounds to above 12000 with the Dow showing single digit year to date loss (currently 7.4% down at 12302).

This will lead to more widespread views that Wall Street will be sticky on the downside and the STI too will not easily break the established 2750-2800 support.

The recent strong rebound to as high as 3181 shows the market’s potential to look at the bright side of things especially with the Singapore economy rebounding strongly in q1, the strong S$ which will mitigate inflationary pressures and the continued bullish economic picture with tens of billions to be pumped into transport and building projects.

The STI’s recent rebound and relatively tame pullback notwithstanding yesterday’s 84 point plunge (lows of 3035 yesterday/today), shows the market had read the local economic and hence earnings picture well and will not over-react to bearish overseas leads more than it had done earlier.

The STI after all is down 12.4% YTD against 7.4% for the Dow when our economic and earnings picture look much better than the US.

Thus there is still a good possibility that the STI will meet our 50% retracement target of 3250-3300 in the next one to 2 months. At this level it will still be 5-6% below 2007 close of 3466.