Downside risks to the STI in the short-term

Four reasons why the aggressive run-up in the STI during the past several days is not sustainable

1) STI is heavily overbought. Current RSI (relative strength index) reading is even higher during Oct 07 when STI hit an all-time high of 3,906. This suggests a state of divergence, where a new high in the RSI has not coincided with a new high in the underlying security. Elliot Wave Count coupled with fibonacci retracements suggests a minimal price target of 2,050. This level also represents the double daily lows seen on 05 & 06 May 09.

2) Banks are also overbought. Run-up in the index of late has been mainly contributed by the three banks where they are also presently technically overbought. Additionally, gainers within the top active counters among the past few days have included offshore marine and oil & gas plays (Ezra / Swiber / Cosco / AusGroup, etc). Potential fall of the index should also drag down the share prices of these sectors.

3) Impending result of stress tests. While results of the stress test of the US are not officially out, the market is already expecting additional capital to be required by 10 of these 19 banks. Notable ones include GMAC (US$11.5 billion), Bank of America (US$34 billion), Wells Fargo (US$15 billion), and Citigroup (US$5 billion). Should actual results indicate that more capital is needed, equity markets may take a tumble.

4) US non-farm payrolls on 08 May 09. While official market forecasts are gunning for 603k jobs to be lost for the month of April, note that the bar has been raised as the ADP Employment Report within the private sector released on 06 May 09 is forecasting for only 491k jobs to be lost. Therefore, even if the actual number released by the US government manages to meet official market forecasts, global indices may still fall as whisper numbers are now gunning for a better figure than -603k. STI may suffer a relatively bigger fall compared to the other indices as it has outperformed most of these indices for the week so far.

DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
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Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
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Neutral: Share price may fall within the range of +/- 10% over the next 12 months
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Take Profit: Target price has been attained. Look to accumulate at lower levels
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Sell: Share price may fall by more than 10% over the next 12 months
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Not Rated: Stock is not within regular research coverage



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