Is STI on the verge of entering a bear market?

AT Friday's close of 2,832.64, the Straits Times Index stands 706 points or around 20 per cent below its 2015 closing high of 3,539 on April 15.

In generally accepted market wisdom, a fall of this magnitude in a relatively short span of time (five months) suggests that the local stock market is on the verge of officially entering a bear market.

This may dismay many observers, among them dealers and retail investors, who have had to withstand a seemingly never-ending flow of negative news this year - the Greek debt crisis, China's slowing economy and imploding, volatile stock market, the will-they-or-won't-they quandary that surrounds the US Federal Reserve's interest rate decisions and alarming weakness in commodity prices.

Contrarians however, may welcome the news since they believe the best money is to be made during the market's darkest days. So, with the STI having fallen almost 20 per cent from its 2015 high, amid thin volume and with the mood as sombre as it is now, does this mean a bottom is not far off?

Financial research firm Ideaglobal in its daily notes on Friday said markets typically undergo periodic crises of confidence and until all the weak positions have been squeezed out, it would be difficult for a recovery to take grip.

"We would therefore expect to see some new lows below the August lows in all the main equity markets before this is over," said Ideaglobal.

"But unless we genuinely get evidence that the recoveries in the major economies have halted, we would see the current decline in equity markets as being close to its end".

There would be a fair number of experienced players out there who would agree. The $64,000 question is of course, how close is close? Our guess is that this would depend first and foremost on the Fed's actions on the interest rate front. The next Federal Open Markets Committee meeting is slated for Oct 27-28, and although there is no press conference scheduled for that meeting, it is still possible (if not probable) that a rate hike could be announced.

Between now and then though, much would hinge on the clues the Fed drops by way of comments from its governors and the robustness of economic releases.

To be honest though, the sooner rates are raised the better, because markets have for too long operated with the slogan "bad economic news is good for stocks". This anomaly has persisted for seven years now together with the zero interest rate regime that was all aimed at avoiding a US depression.

As for China, the consensus seems to be that although there are reasons to worry, it isn't all bad. Bank of America-Merrill Lynch in its China Economic Watch on Friday said despite the country's relatively poor industrial activity data, it does not think China is facing a big risk of a hard landing.

"Overall consumption growth has stayed robust, supporting consumption-related manufacturers and services sectors," said BoA-ML. "Several services sectors, such as internet, leisure and tourism, are benefiting from the structural consumption upgrade amid relatively stable job and income growth outlooks...We believe the government will take more easing measures in the near term to stabilise growth and financial markets."

Apart from how the Fed behaves, traders should note that a short while ago Morgan Stanley in its Asean Equity Strategy said Singapore is its most preferred market in this part of the world. Our guess is that the worst is probably over for most markets, and once the Fed raises rates, things can get back to normal. The Singapore market may be on the brink of entering a bear market, but it's not likely to stay there for too long.

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