This little thing called PE Band

When market falls, it is common to hear people saying that they are eager to go “shopping” for fundamentally good stocks where prices have fallen by 20% or more.  

I am not against fundamental analysis (FA), but would like to point out one thing about FA that we must remember, and it’s something called price earnings (PE) band.

Very simply, when market is in bullish mode, analysts and investors are willing to give higher PE valuation to a stock than they previously did.  For example, a stock with earnings per share (EPS) of 5 cents were previously trading at 50 cents, so at PE of 10X.  When market is bullish, analysts raised the PE accorded from 10X to 20X, the PE band is expanded and the stock could potentially trade up to S$1 instead.  The problem with this is that it is very “subjective”…..analysts and investors can CHANGE the PE band anytime with their own justification or reasoning, which is often related to market sentiment.

As we see it now, when market sentiment is bad, even though the company’s outlook may remain rosy, the PE band previously given to the company may have contracted this time round from let’s say 20 times back to 10 times.  Which is why even if some company continue to deliver positive results ie fundamental remains strong, the stock price may not trade back up to those levels we saw earlier this year due to PE band contraction.

So before you go “shopping”, make sure you reassess the PE band of those fundamentally good stocks….my guess is that they are unlikely to trade back up to those PE band that we saw in the near term due to weaker market sentiment.

To be “kiasu”, look for stocks with single digit PE, especially if you can find those trading back to 5X forward PE and with good growth potential, then the down side could indeed be limited.  Let me know too if you come across any

Article by Rooney

Straits Times Index 3300 level broken, next psychological support level is 3100

In my previous write up titled “Is the market correction over? Don’t guess, let the indicators tell you” I commented that STI was staging a technical rebound and it needs to stabilize above 3300 points (around 1-2 weeks) in order for it to resume a more sustained upward move.  It would be safer to wait for the market to stabilize before going long again. And if 3300 is broken, next support level to watch out for would be 3100.

As we see now, the 3300 points has been broken within 5 days since the rebound on 8th August.  Even during the recent technical rebound, trending indicators such as MMA (multiple moving averages), parabolic SAR and MACD were ALL still negative, indicating high odds that the rebound could be short lived.  With the 3300 support level now broken, NO clear signal to go long yet…..wait patiently lor.

The obvious question is what could happen now that the support has been broken.  When is a good time to re-enter or has the market bottomed?  The interesting thing is that 2 days ago Morgan Stanley issued a report saying it could be a good time to reload. 

Again my thoughts are still the same…….no need to guess, let the indicators tell you. 

You will hear a lot of “noise” if you read newspapers or watch CNBC or Bloomberg or read reports.  You will hear conflicting comments which will confuse you more, some will continue to say the worst is over and that this is just a healthy correction within a bull market, while some will frighten you to say that be prepared to expect worse as the recession may just has started for the US economy.  To me, comments made by these reporters or market commentators are less important to what my “best friend” has to tell me……and he is none other than the “market” himself!!

So if you want to have a better feel of what is ahead, I suggest learning to read Mr Stock Market’s signals, ask him to show you his symptoms, which are all the technical indicators and historical patterns.  These data are FACTS since they are based on actual information ie historical stock price, stock volume and price patterns.

Technical Indicators:

For now, the symptoms for Straits Times Index (STI) are still NEGATIVE :

1.Multiple Moving Averages (MMA) – short term MMA all below long term MMA, means that medium term trend is DOWN. 

2.Moving average convergence divergence (MACD) – turned negative on 26th july and has since REMAINED negative, means STI trend is DOWN ( if you wish to learn about the basics of MACD, do read my recent writeup on this indicator titled What is MACD? )

3.Parabolic SAR – negative signal means trend is DOWN

4.Stochastics – this short term indicator turned negative again yesterday since rebounding briefly on 8th august, so even near term signal also DOWN

In summary, it would seem better to buy PUT warrants or go short than to go long for the time being since short term and medium term signals are ALL negative!!

Since I am not good at going short, I would just have to wait until either MACD or parabolic SAR for the STI to turn positive again before deciding. 

When will that happen? The beauty of technical indicators are that they will tell you WHEN it happens ;)  Patience is needed until that happens.

Article by : Rooney (I injured my leg last week while playing football with my friends)

STI rebounding off first support zone at 3300 points

I mentioned earlier that a typical sharp correction for the straits times index (STI), based on historical patterns is between 10-15% from recent high, with 10% being first support level followed by 15% correction as the second stronger support level….see blog comments below on 1st august

http://www.mojostock.com/blog/recent-two-sharp-market-corrections/

STI is now staging a technical rebound, almost spot on from the 10% correction level of 3300 I mentioned last week. This rebound is not surprising since it coincides with the 10% correction and stochastics for STI is in oversold zone, further increasing the odds of a technical rebound.

For STI to "recover" from this round of sell down, STI needs to form a new base around 3300 points.  So in the next 1-2 weeks, will have to monitor and see if the 3300 level can hold on after this round of technical rebound is over.  If it breaks, then next psychological support level will be at 15% correction from recent high of 3688, which is around 3100 points.

The next question on everyone’s mind is that how long it will take for the market to stabilize.  Well if you believe in technical indicators, then you don’t need to guess, just wait for the indicators to TELL YOU when the market is going to stabilize.

At the moment, most daily trending indicators for STI remained in NEGATIVE zone.  

1. Parabolic SAR negative

2. MACD negative

3. Multiple moving averages - short term all cut below long term

I would prefer to wait for at least ONE of the trending indicators to turn positive before feeling more comfortable that this round of correction may be over.
 

Article by Rooney