Trading Diary (April 17, 2009) --- Dancing At The Top?
I saw interesting dynamics in the US overnight. US equities have another late hour bull rush, driven by news flow and earnings – 1) Philly Fed bounced (April -24.4 from -35); 2) Jobless claims fell (53Kto 610K); 3) Bad news in housing starts was skewed to multiple family homes not single houses; 4) earnings from JPM and GOOG continue to surprise the upside…It seems that the green shoot data continued to frustrate a market prepared to be short the recovery!... It seems the markets are repricing tail risks and future growth as I saw gold down another $15 and poised to test the lows made earlier this month. In other asset classes, USD ends higher and JPY lower despite the equity rally. What now is at risk is valuation and I saw some very senior people in CNBC and BBG start to debate on the shape of the recovery again -- V or W or L? Most see this bounce driven by inventory draw downs. Companies have to now decide whether restocking makes sense as their shelves are empty. But big picture wise, the demand function looks more confusing than the manufacturing stories --- Savings over spending vs. investing over hedging. I think these are important themes to be watched in the coming weeks. In the near term, I maintain my cautious view at this index level as this is a bear market rally. And the past 24 months taught me that it is easier to buy in the middle than at the bottom and it’s too easy to dance at the top!
Back to home markets, starting with China macro data, the weaker GDP (6.1%) was tempered by better IP (+8.3%). Regarding the Economic outlook, Premier Wen hosted the State Council Meeting ytdy – 1) He warned that "the foundation for an economic recovery is still not stable" and said that China must stick to the expansionary fiscal policy and loosen monetary policy; 2) There is nothing came out about the new stimulus plan; 3) NDRC WANG Yimin said the next step is to boost consumption and NBS spokesman said China will rely on consumption growth to reach the 8% GDP target.…It seems Consumer stocks could do some “Buy on Dip”. Other major sector news are 1) Steel --- CSIA said the industry losses widened in March 09, but the sector didn’t cut production. March steel production was 42.08mn tons, up 4.1% MoM. But steel consumption was declined about 5% yoy; 2) Coal/IPP --- Market believes that the low inventory in QHD does not reflect demand recovery at IPPs, but more a result from weak power demand forecast and sufficient inventory at IPPs, which discourages transportation from coal mines to QHD.
Market wise, it seems HSI might run beyond 16K where I have been thinking about a correction due. The recent market reaction increasingly leads me to think that the next correction will be shallow. I doubt it will go much below 14K. I think the quality of the next correction will tell us the true status of stock markets. If I see some of the outperformed sectors can demonstrate resilience, then it would be a good sign because it means we will see some stocks making new highs soon after the correction has bottomed. The sectors in my radar screen are Insurance, Capital Goods, Cement, Construction and Chinese Property
Overseas Market Reviews
Global equities rose 1.2% with +1.7% in US and EU, +0.1% in Japan and +0.7% in EMs on balance. EM went up 2.3% wow vs. +1.2% in DMs. Elsewhere, 2yr and 10yr UST yields moved up 5bp and 7bp, respectively, to 0.90% and 2.83%. 1MWTI oil firmed $0.73 to $49.98/bbl—under $50 for the third straight day. Oil has moved roughly sideways over the past two weeks, ranging from $49.15 to $52.51 over the period. Meanwhile, industrial metal complex slid about 2%, after rising 5% Mon-Wed. USD closed at EUR1.319 (virtually unchanged) and YEN99.3 (-1% wow).
US "dumb money" sentiment
Investors Intelligence bull/bear ratio has risen to 1.27 from 0.97 last week and is now at the most bullish reading for the year. The AAII bul/bear ratio has risen to 1.22 from 0.81 last week. This is the second highest reading of the year and compares with the January peak of 1.27.
> The equity put-call ratio (I look at a 21 day weighted average) has fallen to 0.627, which is the lowest reading since the low of 20 May last year of 0.629. Prior to that the previous low was 0.586 on 15 October 2007
> So, overall, the dumb money sentiment indicators are now on average more bullish than at the January high. They are not, however, yet at the level which marked the top in May 2008.
