Master Rider Blog

The Right Perspective

August 16th, 2007 NW Teong

Hi, I think it is good to revisit my article on “How to tame market volatility?” dated 10^th Aug 2007. I would like to point out point 2 on the liquidity issue. While we all know that under normal circumstances, fundamental analysis is useful. However, under extreme condition such as a severe liquidity squeeze due to stampede in pulling our of stock markets by big funds for what ever reasons, we have to be mindful that this will cause a shift in our fundamental.

In short, under severe condition, when we see capitulation in the share or financial markets, the real economy would get a severe knock which in turn will cause all REAL fundamentals to deterioriate (recall the Asian financial crisis in 1997). If this happens, your fundamental analysis will need to be modified. However, this doe not mean your fundamental analysis is useless. What we need to do is to factor in this event and knowing that, at least at this juncture, the chance of a total capitulation is slim, we should gather a list of good stocks with good potential and importantly relatively in-expensive valuation and wait for a good timing to go in (which is not too far away). Please note that even under an extreme condition, your down side would be limited if you have done your home work.

However, we have to know that at this moment market is volatile, and while we do our home work we have to wait for the dust to settle or any least until the redemption (selling by funds) is over before we buy big time! Caution: market would be volatile, please use the investrade strategy! As for me, while monitor the big picture, I also will not hesitate to buy selective stocks if they are really at a very attractive level even though I know market will still volatile. You need to diversify across different “time zone” too.

Also, I think it is important for readers to note that important of monitoring the movement of interest rate (please refer to  article on “How to tame market volatility?”). I shall try to post a better chart for all of you to view, hopefully the effect is better this time. If you look at the charts below, it really pays to monitor the interest rates movement. The first chart is that of 10-year treasury, a proxy of interest rates movement, second chart is that of Nasdaq, third is the relative movement of the first two charts. Can you see that high interest rates always mean trouble at the markets? For current market correction, it started since 2nd week of July (see Nasdaq chart below) where it peaked at around 2700. However, the interest rate peaked at around middle of June at around 5.2%. Almost a whole month in advance! This in fact is a clear leading signal that stock markets will be in touble. If you superimpose the two charts (see 3rd chart below), you will always notice that the peak in interest rates always preceed a major market correction!

Interesting note on Hi-P: At today’s level at $0.66, this is exactly the same level on around 5^th Mar 07, this is also the lowest level on 21 Aug 06. In fact, at this level, HI-P is at its all time low since Dec 2003. Judging from its fundamental, I would say its down side is really limited. As I said many times before, do not expect an immediate big up swing for tech sector. However, a 30% up swing from this level in 6 months’ time is highly possible! (of course, baring unforeseen circumstances such as a total collapse of financial markets etc)

Cheers!

Entry Filed under: Stocks, Singapore