Weak Dollar, Strong Commodities Driving STI

The breaching of the 1960 level on the STI has precipitated a sharp rally. This corroborates with the inter-market view of a weakening Dollar and strengthening commodities market that is bullish for equities. A close below 82.63 on the Dollar Index should push commodities higher and continue to add fuel to the equity rally. Our price target for the STI is 2300.


S&P 500, Daily, 5 May 2009



S&P 500 busted through the 875 mark on 4May09's trading session to close at 907. This is after the S&P 500 has tested the 875 region numerous times. We also brought up previously that there was a confluence of resistance around 875. A strong rally through 875 tells us that buying has absorbed all the selling that was present.

The major point here is that this up move is not confined only to the S&P 500, but to equities as an asset class, with major equity indices breaking their recent resistance highs. This is a bullish sign for equity markets as a whole.

Next major resistance for S&P 500 is at the 943 to 950 region.


STI, Daily, 5 May 2009



Along with the rest of the major world indices, the STI has rallied very sharply in the past few days. The STI has cleared the pivotal 1960 mark, which is the intermediate term high for the weekly charts.

We mentioned numerous times that the 1960 mark is the first milestone in the STI rally. This recent close above 1960 puts the STI in a very strong uptrend with an interim target of 2300, our second milestone.

We have been of this view since 1April09 and mentioned this precise scenario unfolding in our 2Q09 Singapore Outlook. Investors who are more interested in the details and rationale for our forecast can refer to the 2Q09 report.

Clearing 1960 as resistance, it is now support, as is the 2000 psychological level. Overhead resistance is in the 2215 to 2225 region, then 2300.

In our 22April09 report, we mentioned that we would like to see other major equity indices close above their respective key resistance levels. This would give added confirmation that equities as an asset class are rallying together. This seems to be the case right now. Below are charts for the Hang Seng and German DAX as examples.


Hang Seng, Daily, 5 May 2009



Hang Seng sold off from the 16,000 level. It has closed above this recent resistance level, along with the S&P 500 and STI closing above theirs.


DAX, Daily, 5 May 2009



The German DAX sold off from 4688 and has similarly broken out to the upside as well. Major equity indices are rallying together.


Dollar Index, Daily, 5 May 2009



In our report on 2April09, we stated, "The implications of a weaker Dollar is a stronger commodities markets. A lower Dollar seems to be key to pushing equities in general higher".

This view seems to be unfolding right now. The Dollar Index has weakened and is now testing support at 83.73. We expect the Dollar to test the 200 day moving average and 82.63 support level.

The 82.63 region was the first test of the 200 week moving average, and a close below this level would indicate the Dollar is beginning a major down leg.

A push below 82.63 on the Dollar Index should be very bullish for commodities and this in turn should give a strong boost to equities as an asset class.


CRB Index, Daily, 5 May 2009



The CRB has broken out of its trading range to close above resistance at 231. As mentioned numerous times, a rallying CRB helps to push equities as an asset class upward. This is precisely what we have seen in the past few days.

We attribute the rallying CRB to a falling Dollar, as mentioned above.

Support for the CRB is at 229 and resistance at 244.






Conclusion
The inter-market scenario that we have been calling for is in the beginning phases of unfolding. Equities have sold off from their respective key resistance levels and rallied to close above them, aided by a rallying commodities market that resulted from a weakening Dollar.

We are watching for a break of the 82.63 region on the Dollar Index which should cause a slide off in the Dollar and precipitate a strong advance in the commodity market. In turn, this should give equities as an asset class a strong push to the upside. Additional Dollar weakness should be the catalyst for equities to continue rallying strongly.

The STI rally above the 1960 mark is backed by a falling Dollar, a strengthening commodities market and further confirmed by other major equity indices closing above their recent respective highs. The odds for a decline in the STI are low because of this.

Our interim target for the STI continues to remain at 2300.

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