Business

An anxious wait for US stimulus

Renowned hedge fund manager George Soros once said "stock market bubbles don't grow out of thin air, they have a solid basis in reality, but reality as distorted by a misconception''.

The relevance of this saying to today's market is, of course, whether risky assets such as stocks have run up too much in anticipation of US stimulus that may or may not materialise.

That this may be the case was witnessed last week when the United States President-elect Donald Trump did not mention anything about the economy, much to the disappointment of Wall Street.

Whether or not markets have laboured under a misconception surrounding expected US fiscal stimulus remains to be seen.

Amid allegations that Russia meddled in the US election, Mr Trump's inauguration as the 45th US president takes place this week, and perhaps once that is done, investors will have some clarity on what he plans to do with the economy.

So far though, observers have described the strategies emerging from the Trump camp as largely incoherent, although there is more than just a hint of an impending trade war with China looming.

For local traders, of particular relevance is the popular stock market saying "buy the dips, sell into strength'' because anyone adhering to it last week would have found it to be pretty profitable, though it has to be said this would have applied mainly to the Straits Times Index (STI).

It has to be emphasised that the STI at a 15-month high does not necessarily equate to the broad market also reaching a 15-month high - on Friday for example, when the index rose 32 points or 1.07 per cent thus giving the appearance of significant market strength, the entire market actually recorded 239 rises versus 198 falls.

Moreover, quite frequently during the session when the index stood 20+ points higher, the advance-decline score was tilted in favour of the declines.

The lesson here is one that has often been repeated in this column - stick to trading the index because around 65 per cent to 70 per cent of daily dollar volume is regularly done in the 30 STI components.

Another popular saying is "buy in anticipation, sell on news''. In the case of Wall Street, it was very much a case of "sell on no news'' last week, when stocks and the US dollar, which had appreciated sharply since the Nov 8 election, fell after Mr Trump's press conference.

Still, Wall Street has not corrected that much, so it appears that investors there are fairly confident Mr Trump will deliver on his promises.

A third saying - popular among chart technicians - is "volume usually precedes price''. This typically applies to individual counters when a volume build-up comes in advance of some kind of breakout on the upside and is based on the notion that increased volume signifies increased demand.

In the case of local stocks, it would be banks that have been the greatest beneficiary of rising volume leading to higher prices, the original reasoning being that if a Trump presidency leads to higher inflation - and therefore interest rates - then bank profits will expand.

(Of course higher interest rates could lead to a larger number of defaults from the oil and gas sector, in which case banks would be negatively affected, but for now the market seems to have chosen to ignore this).

A final saying is necessary, and it fits well with the events of 2016 when Brexit and the Trump election did not produce the expected collapses.

It comes from Mr Soros and goes "markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected''.

sivan@sph.com.sg

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts

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