Thursday, October 21, 2010

A confused and desperate market

The market is getting confused.

(The Edge Malaysia, Oct 20) NEW YORK: World stocks and commodity prices fell sharply on Tuesday, Oct 19 after China, the engine of growth in an anemic global recovery, raised interest rates for the first time since 2007 to curb its booming economy.

Wall Street also was hit by fears that U.S. banks might be on the hook for billions of dollars in souring mortgage bonds, driving stocks to post their biggest loss in two months.

The dollar rallied broadly on China's unexpected 25-basis-point rate increase, a move that could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

First the markets condemned China for not taking strong actions to tackle property bubble. When China got serious and raised interest(unexpectedly), the market got scared thinking that would slow down the emerging economies.

Then the market got desperate buying back stocks, find an excuse that the Fed is reaffirming that the US economy will have a modest growth.

They got panic again this morning when they saw this headline which was in-line with what the expected yesterday.

(Bloomberg, Oct 21)Asian stocks fell for a fifth day, the benchmark index’s longest losing streak since May, after China’s economy grew at the slowest pace in a year. The dollar strengthened against 11 of 16 major counterparts.

The MSCI Asia Pacific Index lost 0.4 percent to 129.22 as of 1 p.m. in Tokyo. China’s Shanghai Composite Index slumped 1.3 percent. Standard & Poor’s 500 Index futures were little changed. The dollar surged to 81.83 yen in Tokyo before paring gains to 81.09 yen, unchanged from late yesterday in New York. The dollar was at $1.3918 per euro from $1.3964.

Stocks fell as data from China’s statistics bureau showed the country’s economy expanded 9.6 percent in the third quarter, the slowest pace from the same period a year earlier. The dollar appreciated after the Wall Street Journal reported that U.S. Treasury Secretary Timothy F. Geithner said the major currencies are “roughly in alignment,” suggesting there’s no need for further weakness in the greenback.

The US dollar begins to rebound, a sign of fear is coming back a little bit.

When I said 2 days ago I will take a break until the first week of November, there were 3 reasons I do that :-

1. Risk and reward is not attractive at this level. Anyone buying KLCI at 1,500 will have an expectation that it will go up to 1,700 or 15% earning growth for 2011. I would expect that we will have some growth in 2011 but the rate of growth will be slower than 2010 for sure.

2. After making a new high, I want to see how strong is the support when the market pull back a little bit. If the market is able to absorb about 5-7% pull back without much problem, then taking some fun trades will be fun.

3. It's very difficult to make money when we markets are volatiles. When winners and losers are canceling each other, the nett gain will be very limited. Sometimes we have to let go some gains in order to avoid many losses(unnecessarily).

I probably still have not answered why after first or second week of November? Volatility should reduce quite a bit:-

1. market strategies will project strong Q3 into 2011. I believe Q3 '10 will have best ever quarterly results for 2010. The real sell-off will be in Q1 2011 when they see Q4 results of which I think will be a lot weaker than Q3 '10.

2. political uncertainty will be resolved.

3. Last 2 months of the year are typically more favorable to equities.

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