Tug of war - Bull vs. Bear Ends. Financial market plunges. What's next

The above article commenced mid February with Part 2 in March and Part 3 in April. My benchmark for the tug of war list of events is the DJI ranging from 12800 to 13000. I had picked the above title, then, is because my speculation was that market would trend sideways until the next key events.

The DJI did not reach 13800 which is my technical resistance. The technical support was 12,400 which were breached last week. This demonstrates the risk-reward that was not favourable where market prices IS too high.

In Part 3, I speculated that the market would undergo a correction which you all probably know the answer by now.

Last week, DJI closed below 12,400 together with S&P500 and Nasdaq closing down for the week back to back. Hence, the tug of war or range trading had ended. Leading to the correction were the following list of events:

·         GDP were weak then

·         Currencies were lower (not USD) signalling higher inflation

·         Trade figures were generally weak

·         PMI were generally weak

·         China data continues to be of concern

·         Europe is a primary concern – Greece, Spain, etc

·         US GDP and nonfarm payrolls were weak (not an exhaust list)

·         Adding more insult to the market correction.

The above signals weak growth, higher inflation. This leads to my concern. Aren’t Central Bank and governments in a dilemma again? Monetary policies? Pardon my language – Screwed and f!@#$d??

However, having provided all the bad news.... here comes my technical reading.

Technically, RSI and various indicators signal ‘oversold’ levels. The big boys, fund houses may have program buying at key technical support levels. Hence, there’s a strong possibility the market would take a short breather from these oversold positions.

Following which markets may rally depend on the rebound or if short covering is triggered. We’ll cross this bridge at the appropriate time.

Carry trades

The global sentiment is risk-off. Volatility is high. This leads to unwinding of carry trades in currencies. Hence, safe haven currencies are sought after. The Yen and US dollar rises. Other currencies including commodity currencies weaken. This leads to a fall in commodities – mining, agriculture, etc.

Fundamentally, economic data are weak. There are global growth concerns. And without any geopolitical situation in the Middle East, Oil prices fall. That’s the good news!

Gold. The previous posts ended with Gold testing US 1790. The demand and supply would be determined by QE3 and the US dollar instead of safe heaven. With NO QE3 in sight then. I mentioned fat hope. As expected Gold plummeted to my mentioned support of US$ 1530 thereabouts, did anyone catch the price there? With NO QE3 in sight and if Gold would extend the rally, then I suggest you review your bargain hunting strategy in your investment portfolio.

At the moment, do NOT go all out and buy whatever your reasons is cheap PER, low RSI, etc but simply follow your simple strategy on entry points coupled with a determined discipline to cut losses. Dollar cost averaging will be strongly recommended for a 6-12 months time horizon.

On a separate matter...

Properties. This is probably your biggest and longest investment. Most, if not all would take the longest tenure. Here’s the problem most of you do not see. You’ll be paying the biggest loan and let the bank earn your money. Your principal gets lowered very very slowly. But, while interest rates are low, it is favoured to take the shortest term and lowest loan.  Your interest gets paid more and your principal gets reduced faster. If you chose the former, most of you will be in a BIG financial problem when housing loan rates accelerate to 2-3% and higher. More cash would be paid, affecting your cash flow and liquidity. Review your refinancing loan to avoid this very probable disaster you ever make.

The main point here is future afforability. Do not be blinded by low interest rates. Do NOT stretch your loan. It's ONLY a short term benefit. On the flip side of the coin you should take the opportunity of paying less interest at a shorter tenure with the lowest loan! Anyone disagrees with this point?