Week of wild swings in market; warrants thrive - SGX

SGX Market Commentary
Published October 27, 2007

Week of wild swings in market; warrants thrive

By R SIVANITHY
SENIOR CORRESPONDENT


ANOTHER roller-coaster week - thanks to wild swings on Wall Street and Hong Kong - yesterday ended with the Straits Times Index (STI) surging 64.41 points to 3,771.55, thanks mainly to a large push on the banks.



The main trading strategy? Ride the momentum, whichever way it went.






Over the five days the index gained 24 points, but throughout the week performances were not wholly convincing, notwithstanding what the index might suggest.

On Monday, for example, the index plunged 105 points in response to a severe Oct 19 sell-off on Wall Street that briefly rekindled memories of Oct 19, 1987 - or Black Monday, as it became known.

Wall Street's avoidance of a follow-up plunge was instrumental in helping to stabilise prices around the world, and the seeming ease with which it took news of a huge Merrill Lynch sub-prime-related write-off in its stride also helped restore confidence.

In all sessions though, it was necessary to keep an eye firmly on Hong Kong's Hang Seng Index and/or the December futures contract on the Dow Jones Industrial Average. Sudden twitches in either or both had an immediate impact here and 100-point moves in the STI were common.

Volatility increased sharply, especially with the Hang Seng Index regularly undergoing 1,000-point movements in a single trading session.

Program trading, short-selling and short-covering were all very much in evidence throughout, the targets being mainly the large, liquid blue chips. The main trading strategy? Ride the momentum, whichever way it went.

Perhaps the single most interesting feature was the surge of interest in structured warrants. Yesterday's business in the instrument was $208 million, roughly 6 per cent of the $3.5 billion that was traded - a marked increase from the 4 per cent average for the first nine months of this year. Every day, warrants featured prominently in not just the top percentage gainers list but also absolute gainers. These were mainly warrants on the STI and Hang Seng.

Other than warrants, shipping and shipyards provided fertile hunting opportunities for investors. In particular, China shipyard Cosco Corp continued its upward climb following a mid-week announcement of yet more contracts that led to a fresh slew of broker 'buy' reports.

DBS Vickers, for instance, on Thursday said it has raised its target price for Cosco to $9.00 based on 12 times bulk shipping earnings, a 50 per cent rise in capital value of vessels since January, and 30 times FY09 shipyard earnings. Having started the week at $7.50, Cosco finished it at $7.70, a tad below its closing record of $7.80 achieved a week earlier.

The banks have always led the index throughout this year, and this week was no different. DBS's announcement yesterday that its provision for US sub-prime-related losses amounted to less than what was expected helped its shares rebound, with a 70-cent rise to $22 adding 11 points to the index. Sympathetic rises in UOB and OCBC added a further 17 points.

In the second line, penny stocks continued to flag - the UOB Sesdaq Index, for instance, yesterday dropped 0.26 of a point to 231.59. Favourites such as Ei-Nets and Memstar appear to have fallen off punters' radar screens, while Uni-Asia Finance started the week at $1.59, crashed to $1.04, and finished the week at $1.38. The stock has been the subject of some controversy lately after local broking firms placed trading curbs on it.

Conclusion - from the look of the events happening lately, all these point towards a market correction soon. The wild swings are mainly related to people playing the index stocks one way or the other. For the rest of the market, generally quiet and bias towards moving lower. Therefore unless one is very focus on daily trading of buy and sell....it is too dangerous to remain "long" in this type of situation.