My latest book “Chaos” has finally been published. Amongst the 50 odd books I have written, three books were dedicated to a detailed analysis of the stock market during different era.
The first of such was “Brace for the Turning Tide” published in 2007. Back then, the book warned investors of their irrational exuberance that was fuelling the impending financial apocalypse.
The second book “Golden Opportunity” was published some time in the third quarter of 2014. In that book, I explained to readers why the launch of the Shanghai-Hong Kong Stock Connect would spark a huge rally.
This time round , as the name of my latest book “Chaos” suggests, I try to caution investors of the uncertainties ahead. In such a period, prudence and carrying out due diligence would pay off.
Last year October was one of the most frightening months for the Singapore and Hong Kong stock markets. The local Straits Times Index (STI) plunged from over 3,600 to 2,900 while the Hong Kong barometer Hang Seng Index (HSI) also dropped significantly from 32,000 to 24,500 .
The stock market saw some respite in November after being oversold, but another round of massive sell-off returned in the following month. This dealt another major blow to investors’ confidence, as the STI and HSI fell below the critical psychological level of 3,000 points and 25,000 respectively for the second time in just three months. As a result, many investors were led to believe that the stock market would continue to trend downwards in 2019.
During the tumultuous few months, several investors closed their positions to hold cash. Having a cash war chest indeed provides investors an opportunity fund to buy at bargain when prices are lower. However, most investors do not live up to the full essence of the old adage that “cash is king”.
In reality, most of those who had previously taken money off the table did not capitalise on the rebound during the first three months of 2019. At the onset of the rally in January, many feared falling into a bull trap. However, when the rally continued into February, these investors changed their outlook, but were still sitting on the sidelines hoping for a correction.
But what happens if the rally extended itself? The “fear of missing out” takes over and these investors enter the market at expensive prices. More often than not, they tend to get caught in a correction immediately. The problem is compounded when investors do not have any strategy to manage their positions, closing their positions prematurely due to the lack of confidence.
Fortunately, the “Chan’s Channel” technique which I developed, managed to signal a rebound at end-October last year. Both the STI and HSI were sitting on the 75-percent support channel. Over the past 10 years, the two indices have always fluctuated above the 75-percent level. On an interesting note, a Taiwanese author renamed the technique as “5 Guiding Investment Lines”, back-tested against numerous Taiwan stocks and wrote two books about it.
The broader market rally has not been without its speed bumps. One reason is due to rotational plays in this environment. Due to the lingering fear of a bear market, speculators were afraid that the rebound could be short-lived. As such, they do not hold long-term positions and take profit or cut losses once the opportunity arises.
Consequently, each sector took turns to come under heavy correction against the broader market rally. This phenomenon weighed on investors’ confidence to hold onto any positions. The worse is for the short-term speculators that chase the market at the high just before the whipsaw.
Currently, the most ideal strategy is to wait for a correction before accumulating. Since strength in the broader market remains intact, investors should instead wait patiently for the next wave of uptrend.
Over in the US, stock prices continue to rise unabated. The bellwether Dow Jones Industrial Average index is just 1.6 percent shy from its historical high. Moreover, US-China trade negotiations are progressing smoothly and the trade truce has been extended indefinitely. Coupled with the Federal Reserve holding interests unchanged, with the possibility of interest rates cuts, it should be a matter of time before the Dow makes a new record high.
While the US and China have yet to reach a trade deal, President Trump is already threatening to start a trade war with the EU. Trump has accused that the EU’s subsidies to aircraft maker Airbus has adversely impacted competition for US’ Boeing. The threat of a new trade war initially caused the US stock market to tumble. However, the decline was limited as US tech stocks showed strength, with some even bucking the market to climb higher.
Cloud computing is beginning to stir up some interest. The US Department of Defense raised eyebrows when it opened bidding for a US$10 billion cloud computing contract. If it had not been Trump, 5G concept stocks in the US would have also drawn more speculation.
Currently, it is still an unknown whether the US largest smartphone maker Apple could buy Huawei’s 5G smartphone chips. This uncertainty could weigh on Apple for a while. That said, 5G concept has brought about a wave of speculation for telecommunication technology companies, not just in the US but also in China, Hong Kong, Japan and so on. Given the potential of 5G, it is likely that speculative interest should remain for a while.
During the initial trade skirmish with China, many investors had thought that Trump was all bark as he only imposed a 25-percent tariff on US$30 billion worth of Chinese goods. However, within half a year, Trump hit China with another 10-percent tariff on an additional US$200 billion worth of Chinese goods. In the US-EU trade war, Trump would most likely employ a similar tactic by first starting with aircrafts, before expanding the list to target other goods such as automobile, wine and agricultural products.
With 2020 being the election year, Trump seems eager to reshape all of the US foreign trade relations. Already, Trump has successfully rebranded the NAFTA agreement with the US-Mexico-Canada Agreement (USMCA). Next, he is targeting the EU and Japan and will likely force them to set up automobile production lines in the US or face punitive tariffs that Trump has reiterated would be imposed on all imported cars to the US.
Once the US and EU officially begin trade negotiations, US automobile and machinery stocks should see higher level of speculative activities. The Japanese stock market would face downward pressure, especially in the automobile sector.
Recently, the US announced that it would not be extending exemptions for Iranian oil, causing oil prices to spike three percent on the news. Meanwhile, China’s stock market declined two percent on that day, with aviation stocks bearing the brunt, but oil counters jumped higher to hit the daily limit.
Last year November, the US has granted China, India and six other countries a 180-day exemption to stop importing Iranian crude oil. The start of May would mark the end of the waiver.
On 22 April 2018, the White House said that it would “take timely action to assure that global demand is met as all Iranian oil is removed from the market”. The move is intended to bring Iran’s oil exports to “zero” and remove the regime’s main source of revenue.
Just a few months ago, Trump slammed OPEC for limiting production. This time round, Trump’s move seems more premeditated as the US Secretary of State Mike Pompeo said that other countries would raise production to fill in the supply gap left behind by Iran’s crude.
Ever since the US successfully produced shale oil, the US has become one of the largest producer and net exporter of crude. Moreover, the US also has the largest strategic oil reserves in the world.