10 March 2008

Valuation Support

First of all, you must be wondering why the market seemed to be recovered after Aug 2007 but the rally does not continue and STI corrects heavily after Oct 2007 until now.

As I always emphasise on ADL (market internal strength) analysis, the ADL must be strong together with STI in order for a rally to continue. If you look at ADL high on July 2007 and compares it to early Oct 2007, the ADL high on Oct 2007 is a higher low. Surprisingly no one believes on what ADL told us on early Oct 2007 when it retreats when STI rallies.

**Refer to this link (forumer slipraven shouts ADL divergent on 9 Oct 2007) . **

Not long after that, I closed all my positions and stayed cautious. From there onwards, I started to trade in short term swing and reduced my holdings.

One thing I realised recently, there is a relationship between STI retracement vs ADL retracement. I can't find any related article on this but it is very similar to ccloh's S-theory. You must wondering why all the TA indicators went haywire and you can't believe what you analyse at all. Yes, half true because market gone irrational and screw up the index vs valuation of the market.

During a market correction (or whatever you call it), the momentum of STI retracement is different from ADL retracement from time to time. Sometimes ADL retraces a lot but STI only retraces a little. Example below:

On 23 Nov 2007, STI retraced 14.2% from the peak and ADL retraced 295% from peak. This creates a "oversold" phenomenon which resulting a strong rebound to 11 Dec 2007 when STI retraced 7.4% and ADL retraced 262%.
Why the rebound was denied? It is because it reaches the valuation resistance. In brief, it is a phrase that I came out to describe market pulled up too much until the market is over-valued compared to its internal strength. It is an opposite to 23 Nov 2007 when market is under-valued compared to its internal strength.

In the chart above, there is two valuation resistance because the nature of the market to self-adjust its price and value. After a long time acting irrationally, the market finally readjust itself. The self-adjust does not means STI will rebounds or will be further dipping. The readjustment means market is much stable than previously as its support and resistance is nearer to each other.

There are much to say but it is hard for me to describe the condition. Now, we are still slightly over-value compared with the internal strength. Since we are at between support and resistance, it is not recommended to long or short. Besides, the market internal strength will not forever go down because there must be a value for the companies in STI. I would like to find a final support for STI before go long. Ratio of 0.06 in the chart seemed possible to become strong valuation support when we join all the peak together.

Until then I shall stay cautious and hedge Put when this ratio rebound to valuation resistance.

House Number

01 AmFraser
08 CS
12 Lim&Tan
20 Philip
21 KimEng
25 Daiwa
26 BNP
31 DMG
35 SBI E2
36 Fortis Clearing
37 Lehman Brothers
39 Instinet Singapore
71 Nomura
72 Daiwa
73 Macquarie
77 ABN
78 Merrill Lynch
79 JPM
82 MS
83 Citigroup
84 UBS
86 DBSV Online
87 Westcomb
Thanks ccloh for providing my long lost house number list


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