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Saturday, March 3, 2012

It's not a long-term bull: Daryl Guppy

Published March 3, 2012


The technical analyst and trading coach notes that the Dow Jones Index does not appear to be able to get past a resistance level, and trading volume is low


By GENEVIEVE CUA
PERSONAL FINANCE EDITOR


MARKETS have been on a tear in recent weeks, and that is a relief to investors who have endured a sharply volatile ride last year.

But don't make the mistake of thinking that a long-term bull market has ensued, says technical analyst and trading coach Daryl Guppy.

This view is echoed in OCBC Investment Research's ETF research this week. Markets, the paper says, look overbought 'which could lead to a correction once the macro-environment re-surfaces and re-ignites another wave of adverse investor sentiment and behaviour'.

In the current year to end-February, the MSCI World Index has risen 9.8 per cent. The MSCI Asia ex Japan index has also appreciated by 15.4 per cent.

Based on fund flows data by EPFR Global, investors pulled money out of equity funds in the week ended Feb 22, but Asia ex Japan equity funds managed to attract inflows, as well as India, Indonesia and Taiwan equity funds.


We've endured two years of sideways market in the STI. In the last 12 months, the index has seen a 5 per cent upside and an 19 per cent downside ... You can't reasonably hold in that environment.

-- Mr Guppy


Mr Guppy says it is important to take on the stance of an 'old' bull, or an old hand in the market. 'Yes, the (US) market will rise, but where is the genuine sustainable long term trend? You can take advantage of the rising market, but you don't sit back and think this is a new bull market for the 21st century. The old bulls have seen it before and they are cautious. The young bulls are excited.'

He bases his expectation on a couple of factors - that the Dow Jones Index does not appear to be able to get past a resistance level. And, trading volume is low. 'What's driving the Dow? It's not broad retail participation. American deposits in cash in the last quarter of last year were the highest they have been for 2011. There's no fuel driving this rise which makes us a little suspicious.

'We know that 50 to 60 per cent of the activity is driven by ETFs. This suggests that investors are directing ETFs to buy and sell, which has an effect on the index as distinct from people buying the index components.'

He observes that in contrast to last year where market rallies were short, lasting three to four weeks, the rallies in recent weeks have been more extended, lasting six to 12 weeks.

This, however, warrants caution. 'This means that when the market sells off, it's likely to sell off in a very large way and you have a good chance of surrendering all the profits of the last three months over two to three days as the market retreats in hysteria. So, as you trade the market as an extended rally, use fairly tight stop losses, and be prepared to sell when the trend looks like it's changing because the change has a high probability of being very rapid and substantial.'

The China equity market, based on the Shanghai Composite Index (SCI), however, has broken its 12 to 18-month downtrend, and is moving towards the 3,000 level, he says. 'I think we can move from 2,300 to 3,000 within a few months or weeks.' The SCI is currently trading above 2,400.

Singapore's stock market tracked the US market in the past, but that relationship has broken down. It doesn't track the China market either. 'The STI is a little directionless in a sense. The lead depends on breaking news overnight rather than an underlying change in other markets.'

Oil, he says, may see a 'parabolic' or a very sharp rise.

'What we look for in oil is a fast breakout, a rapid move towards US$115 maybe towards US$120. There is a potential to develop a longer term parabolic structure which means a very fast acceleration but a rapid collapse.' Event risk could well cause oil price to spike, such as action by Iran which further dries up oil supply. Already there are Western trade sanctions against Iran which are crimping its oil exports.

Gold, he says, is trading within a band of US$1,650 per ounce at the lower end, to US$1,750. It could break out to US$1,890 but this raises the potential for a sudden correction.

Mr Guppy says volatility in the last couple of years is changing the way trend is defined in technical analysis.

Typically, technical analysts hold that the price of an asset defines the trend. But sharp intra-day volatility has rendered that inadequate.

Since the 2008 crisis, he has supplemented price analysis with the study of trend volatility as well, which allows a means to infer the behaviour of traders and investors.

Stop losses, for instances, are set based on indications from trend volatility.

While trading on technicals may be offputting to many, investors may have to brace themselves to become more active investors.

Mr Guppy believes buy-and-hold investing can be destructive to one's wealth.

The Straits Times Index's risk-reward ratio, for instance, argues against a buy-and-hold approach.

'We've endured two years of sideways market in the STI. In the last 12 months, the index has seen a 5 per cent upside and an 19 per cent downside (compared to the opening price for STI in January 2011).

'You can't reasonably hold in that environment ... Yes, you could buy at the bottom and sell at the top but people can't do that.'

He adds: 'We are consistently told we should invest with a 10 or 20-year time frame. That's unrealistic. In today's conditions, we can't reasonably look out for three or five or 10 years.

'We can be comforted by the fact that the market always goes up. But that itself is a lie because the components of the index change. Short term investing is still here.'

In its report, OCBC's ETF research says that the diversification benefits supposedly offered by broad-based equity indices 'are not as available as once thought', as correlations are expected to rise.

'In anticipation of a market correction, we advocate investors re-think their allocation strategies and consider moving into quality, defensive sectors or low-beta asset classes.'

It also points out that volatility, as measured by VIX, is at six-month lows. Even though near term VIX futures have inched up recently, it is still at 'relatively benign levels associated with periods of stable sentiment'.

This suggests demand for downside risk protection 'has not yet picked up, and investors should use this opportunity to hedge themselves against an eventual market correction'. - BT

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