Risk aversion back in markets

A strong Japanese Yen, rallying Bond market and falling commodity complex indicate to us that risk aversion is returning to the markets. However, the trends for these markets have yet to establish themselves and we might see a choppy STI and S&P 500 in the mean time. We advise investors to stay on the sidelines until there is a clearer directional bias for the STI.


S&P 500, Daily, 9 July 09



The S&P 500 has tested the 879 mark after rejecting overhead resistance at 930. We are reassessing our view as stated in our previous report.

The inability to push higher after strong short term momentum indicates innate buying pressure is weak. Recent price action also points out that the S&P 500 is probably in the midst of forming a head and shoulders top. Volume has just beginning to pick up for the downward move and immediate momentum seems to be pushing downwards as well. Our bias is hence neutral-bearish. We await a good close below 879.

A close below 879 should indicate that price action stands a high chance of heading lower. Support is at 853 and then 845.


STI, Daily, 10 July 09



Compared to the S&P 500, the STI has generally displayed more relative strength. Rallies have been sharper and declines milder. We also mentioned a bounce of light support at 2211 indicates that there is still some push left in the STI.

We have also seen the Japanese Yen appreciate sharply against all currency majors, a rally in bonds and a decline in commodities. Sector rotations in the S&P 500 indicate risk aversion and money flowing into Singtel as well as the 3 banking stocks indicates that the market is starting to get more defensive.

Typically we see these type of rotations towards the tail end of a move. Our hunch is that once buying in the defensive sectors has run out of steam, the STI should begin to decline. We expect the STI to be in a volatile range in the mean time.

In light of this, our stance is neutral-bearish. STI has light support at 2235 and key support at 2211. There is light resistance at 2300 and key resistance is at 2361.


CRB Index, Daily, 9 July 09



CRB has slid off strongly in the past week. After resting at light support at 246, the CRB broke decisively and as of 9July09's trading is at key support level 231.

Amongst its components, crude oil for August delivery has sold off strongly from US$73.90 to US$60.34. Industrial metals, nickel, aluminium and copper are also displaying technical weakness.

The above mentioned commodities are typically indicators for economic sentiment. The CRB being driven lower by a decline in these few commodities tells us that markets are becoming increasingly pessimistic about the economic outlook and thus more risk averse.

There is some support at 229. However, it is very near 231 and is likely to be weak support. The next significant support is at 220 and then 215.


US 10 Yr Note, Daily, 9 July 09



The chart above shows the price of the US 10 year note. Typically it is used as a gauge of inflationary expectations and at times, risk aversion as money flees from risky assets into bonds which are perceived to be safer.

The bond market rallying with the Japanese Yen and a decline in the commodity market is a typical indication of risk aversion by the broad markets.

From the chart, we can observe that the 10 year note has rallied strongly to close above the 50 day moving average.





Conclusion
On 9July09, we saw trading in Asia generally mixed. The STI staged a strong 1 day rally in the face of a weak Hang Seng and falling Nikkei. As of this writing, the European markets are rallying. This is likely due to the overly sharp rally in the Japanese Yen and sharp drop in the CRB. The markets might take some time to digest these moves and reverse somewhat in the process.

The main thing is that the inter-market picture is indicating that risk aversion is returning. Over the past week or so, we have seen the commodity market sell off sharply, bonds rally and the Japanese Yen strengthen. This is a message from the inter-market picture that we cannot ignore.

We are also seeing generally weak breadth in the STI and its equivalent (weak sectors) in the S&P 500. These are signs of weakness and not strength.

However, it might take awhile for risk aversion to get fully priced into the equity markets. The S&P 500 looks like it is in the midst of forming a head and shoulder top, but it probably needs more time to form completely. We will likely see the S&P 500 range trade in the mean time. We forecast a similar choppy market for the STI in the mean time as well.

We advise investors to stay out until the markets indicate a clearer directional bias.

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