SSEC: A Strong Bear Market Rally Ahead

With S-chips fallen almost 70% in value from their October peak, an average 20% EPS CAGR over FY07-09 coupled with inflation pressures abating, DBS Research sees the risk-reward ratio for S-chips becoming more attractive. With leadership from the China stock indices, the beleaguered S-chips could see a revival.

A strong bear rally should lift the SSEC from 2200 to 3000, followed by 3500. ETFs best instruments to track anticipated rebound: Examples are 2823 HK and 2827 HK.

We re-iterate the following technical factors that support our view for the SSEC to embark on a strong bear market rally off 2200-2430 towards 3500:

1. Our wave count shows that the downtrend for the SSEC should terminate at 2200-2430 and this should be followed by a strong bear market rally towards 3500.
   
   
2. Bullish divergence from leading indicators - The daily MACD has exhibited 2 clear instances of bullish divergence. Bullish divergence is also seen on the 8-week RSI. This forewarns a reversal of the current downtrend.
   
   
3. Oversold indicators - Both the 14-day RSI and 8-week RSI have fallen to oversold levels and is poised to turn up again.
   
   
4. 2242 forms a support point because it coincides with the peak of the 2001 bull market top for the SSEC.

Off this low point, we anticipate a strong bear market rally that should lift the SSEC to the 23.6% upward retracement at 3000. A minor pullback towards 2680 may occur but this should be followed by another upswing towards the 38.2% upward retracement at 3500. Strength towards this level implies:

1. A rally heading for the 200-day exponential moving average.
   
   
2. A test and likely closing of the 'downside gap' formed on June 10 at SSEC level 3215 to 3300.

The Shanghai A-Shares Index and the CSI 300 mirrors the SSEC closely and exhibits similar technical characteristics. All 3 indices should participate in the anticipated bear market rally.

ETFs are the best instruments for investors to gain a direct exposure to the China stock indices. Examples are the iShares FTSE/Xinhua A50 China Tracker (2823 HK) and the CSI China Tracker Fund (2827 HK).

With leadership from China indices, expect the beleaguered S-chips to be lifted as well.

The relative performance chart below shows that the FTSE ST China Top (FSTC) Index tracks the SSEC closely while the HSCEI tracks the HSI. The FSTC fell 56% YTD and almost 70% from its peak in October 2007. This compares closely with the SSEC 52% YTD fall and the 62% correction from the October 2007 peak.

GENERAL DISCLOSURE/DISCLAIMER
This document is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities (Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). [This report is intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of DBSVR.]

The research is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. DBSVR accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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