Ernest’s market outlook (13 May 16)

Dear readers,

I have taken profit on some stocks and reduced my percentage invested from 50% on 6 May 2016 to approximately 36% on 13 May. Notwithstanding some potential small technical rebound in some markets, I remain cautious. Although I usually do my market updates every fortnight, I deliberately did one this weekend after my write-up on 6 May.

Read on to find out why, and how I intend to take advantage on this development.

 

S&P500 Index

Just to recap what I have mentioned on 6 May 2016 (see here), I wrote “although market sentiment seems to have taken a turn for the worse, it is likely that there may be a small technical rebound in the near term. In addition, it is unlikely that S&P500 may break the strong support 2,018 – 2,025 in the next one week. However, S&P500 is unlikely to breach the strong resistance around 2,080 – 2,100 in this short term technical rebound.”

–> From 9 – 13 May 2016, there was a small technical rebound and S&P500 bounced up to a high of 2,085 on 10 May and met with my aforementioned strong resistance 2,080 – 2,100. It was unable to breach the strong resistance and immediately slid 38 points, or 1.8% to close at 2,047 on 13 May.

Based on Chart 1 below, S&P500 seems to be forming a potential bearish head and shoulder formation with the neckline around 2,040. This formation needs confirmation with a break below the neckline with volume expansion. An eventual measured technical target for this potential bearish head and shoulder formation is around 1,966. RSI closed at 44.0 on 13 May 2016. ADX has decreased from 17.5 on 6 May 2016 to 14.7 on 13 May 2016, indicative of a lack of trend.

Near term supports: 2,039 – 2,041 / 2,020 – 2,028 / 1,996

Near term resistances: 2,066 / 2,083 / 2,104

Chart 1: S&P500 – potential head and shoulder pattern formation

S&P500 chart as of 13 May 16

Source: CIMB chart as of 13 May 2016

 

Hang Seng Index

On 6 May 2016, I mentioned that “Hang Seng chart bullish tinge has been negated with a break below 20,500. 21D, 50D and 100D EMA have turned down. Hang Seng is likely to trade within the range of 19,500 – 21,000 in the next couple of weeks. A sustained break below 19,500 is bearish for the chart.”

–> For the past one week, Hang Seng traded between 19,595 – 20,348 and closed at 19,719.

Based on Chart 2 below, Hang Seng looks more bearish than last week. All its exponential moving averages (“EMA”) such as 21D, 50D, 100D and 200D have turned down. 21D EMA has formed death crosses with 50D and 100D EMA. ADX has started to climb from 18.0 on 6 May 2016 to 22.1 on 13 May 2016, indicative of a trend. RSI closed at 31.7 on 13 May 2016. This is not considered oversold yet. Given the current chart outlook, Hang Seng is likely to close the breakaway gap (19,420 – 19,784) formed on 1-2 Mar 2016. As previously mentioned, a sustained break below 19,500 is bearish for the chart.

Near term supports: 19,420 -19,500 / 19,072 / 18,765

Near term resistances: 19,784 / 19,958 / 20,060 – 20,110

Chart 2: Hang Seng – looks more bearish than last week

HSI chart as of 13 May 16

Source: CIMB chart as of 13 May 2016

 

STI Index

On 6 May 2016, I wrote that “My personal opinion is that STI is likely to have limited near term downside in the next one week with near term supports at 2,713 / 2,695 / 2,680 – 2,682. Amid the continuous falls, there is likely to be some technical rebound in the near term. In the event of a rebound, STI is likely to find resistance at 2,775 / 2,791 / 2,818 – 2,825 and strong resistance at 2,860 – 2,885

–> STI’s closed 35 points, or 1.3% higher to 2,766 on 9 May 2016 at 2,766 before it continued to slide for the next few days. It touched my aforementioned support at 2,713 on 13 May 2016 before closing at 2,735 on the same day. For the week, STI closed 4 points or 0.2% higher.

Based on Chart 3 below, STI’s technical outlook has deteriorated with all the EMAs declining. 21D EMA has formed death crosses with 50D and 100D EMA. 50D has also formed death cross with 100D EMA. RSI closed at 35.6 on 13 May 2016 which is not oversold yet. ADX climbed from 21.3 on 6 May 2016 to 26.1 on 13 May 2016, indicative of a trend.

My personal opinion is that over the next few weeks, notwithstanding some small technical rebound, STI is likely to trend downwards. In the event of a rebound, STI is likely to find strong resistance at 2,788 – 2,823.

Near term supports: 2,713 / 2,695 / 2,680 – 2,682

Near term resistances: 2,746 -2,750 / 2,764 – 2,766 / 2,775

Chart 3: STI – may trend lower in the next few weeks despite some small technical rebounds

STI chart as of 13 May 16

Source: CIMB chart as 13 May 2016

 

FTSE ST Small Cap Index (“FSTS”)

On 6 May 2016, I wrote that “FSTS’ 21D, 50D and 100D EMAs have turned downwards. In the next two weeks, FSTS is likely to consolidate between the range 391 – 401. A break below / above 391 / 405 points to a measured technical target of 377 / 419 respectively with the latter (i.e. bullish break above 405) being very unlikely.”

–> FSTS was weaker than expected and closed at 389 on 13 May 2016, below the range 391 – 401.

Based on Chart 4 below, FSTS broke below the 3 month plus trading range 391 – 405 which is a negative development. 21D, 50D, 100D and 200D EMAs have turned downwards. A sustained break below 391 points to a measured technical target of 377.

Near term supports are at 384 / 377 / 375

Near term resistances are at 392 / 397 – 399 / 401

Chart 4: FSTS – broke below 3-month trading range 391 – 405

FSTS chart as of 13 May 16

Source: CIMB chart as of 13 May 2016

 

Conclusion

I have been extremely busy in the past one week due to trading and corporate result briefings. I have reduced my percentage invested from around 50% to 36% as I took profit on my positions last week.

In the next few weeks, I am wary of the upcoming FOMC and UK referendum in June. In addition, as most companies have already reported their results and / OR have gone ex-dividend, there are less catalysts for funds to hold significant equity positions. In addition, China, Hong Kong and U.S. have reported patchy economic data. For example, China reported weaker than expected PMI data, industrial production, retail sales and fixed asset investment. Hong Kong reported a surprise contraction in their 1Q GDP. U.S. reported weaker jobs data in the previous month.

Although I am cautious on the overall market in the next couple of months, I have spotted at least two companies which I may accumulate on weakness. (My clients will be duly informed on new stocks which I have entered and any significant portfolio change.)

Besides the two companies, I remain watchful of possible trading opportunities on oversold opportunities in our blue chip / large cap companies. Table 1 shows the Top five Singapore listed large cap companies sorted by total potential return using Bloomberg data as of 13 May 2016. I have used the following simple criteria to sort out the stocks by total potential return (i.e. estimated capital gain + estimated dividend yield).

a) SGD adjusted market cap >= S$1b; AND

b) Analyst target price >= Last done price.

 

Clients and readers who are on my website signup lists will automatically get the full list of stocks sorted by the above criteria. Readers who wish to be notified of my write-ups and / or informative emails, they can consider to sign up at http://ernest15percent.com so as to be included in my mailing list. However, this reader’s mailing list has a one or two-day lag time as I will (naturally) send information (more information, more emails with more details) to my clients first. For readers who wish to enquire on being my client, they can consider to leave their contacts here http://ernest15percent.com/index.php/about-me/

Table 1: Top five Singapore listed large cap companies sorted by total potential return

Top 5 stocks sorted by total potential return 13 May 16

Source: Bloomberg as of 13 May 2016

 

Lastly, many new clients have asked me how I screen and decide which companies to take a closer look / write. To understand more about my basis of deciding which companies to write, you can download a copy of my eBook available on my website here.  

 

P.S: Do note that as I am a full time remisier, I can change my equity allocation fast to capitalize on the markets’ movements.

 

Disclaimer

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