November 29,2010

Market Bodes Ill at Aftermath of Korean Peninsula Shelling

By Hong Hao,Beijing

Excessive investor bullishness ominous; markets should get ready for a further fall:


It is complicated. Our market sentiment index has been showing excessive investor bullishness since two weeks ago. This index is at a level similar to where it visited in mid January and mid April ?two periods coinciding with the inception of severe market correction in 2010. Further, our sentiment index also spotted the significant bullish reversal in China markets in late August. That is, our sentiment index has had a good track record in identifying important market inflection points so far this year. Undue bullishness tends to bode ill for major China market indices in Hong Kong and Shanghai in coming weeks.


Meanwhile, China is continuing to rein in excess liquidity, the Irish CDS spread is blowing out and instability on the Korean Peninsula has not been resolved. The realized volatility of market index is surging further - a development that we have been warning about since two weeks ago. This is an important bifurcation between investor perceptions and market reality. Investors should take note, and take shelter. Defensive sectors such as healthcare, utilities, consumer staples and telecoms are likely refuge for relative investors. Absolute investors can wait a little.


Korean Peninsula a significant source of market volatility; continue to stay put for now:


The Korean Peninsula has been a significant source of market volatility so far this year. Every incidence of conflict on the peninsula corresponds to a surge in market volatility: late May, late August, late October and now. Each of these periods witnessed the China markets plummeting to near-term lows before recovering. The silver lining is that each of these plunges marks a final stage of the surge in market volatility. Risk undertaking is not commensurate with potential rewards for now. While we remain hopeful regarding the bullish market uptrend beyond the next few weeks, investors should continue to stay put for now for a better entry point later.


Poor IPO performance tends to coincide with surging market volatility:


Three IPO deals were delayed last week in the Hong Kong market, including Bluestar Adisseo Nutrition Group, China Datang Corp Renewable Power Co Ltd and China New Materials Holdings Ltd. We note that withdrawal or postponement of IPO deals tends to correspond to surging market volatility. There have been eight IPOs withdrawn or postponed so far this year, with four in May-June and four in November - both periods witnessed major corrections. Meanwhile, we saw a negative weighted average first-day return for IPOs this month, or IPOs closing below their offer price on their debut ?another warning of heightened market volatility in the near term.


(Tha author is a global strategist at CICC. )





Click to Get New TextCan't read this text? Please click the image!
Please verify the text in the image.