False dawn in Asia?

By M H Ahssan

Asian equity markets had their best week in months, yet at least one technical analyst has called it a "dead cat bounce". Bloomberg News reported the skepticism of Martin Marnick of Helmsman Global Trading, who used technical indicators to reach this judgment. The MSCI Asia APEX 50 Index, which had risen 8% in the five days before Friday's trading session (and 12.9% in the previous eight days), has a medium term resistance in a band from 500 to 520.

But Marnick wisely hedges his bets by saying that even if the index exceeds that level, it will still fall again later. The last rally that it sustained above that level was last October, when it hit 588 before declining to its medium-term low of 389. In late mid-morning local time, it is at 467. The question, then, is whether the rebound from 403 on from last November is a short-term corrective rally in a bear market set to resume its fundamental character, or the beginning of a longer multiphase rally still within a broader and longer bear market.

Therefore we really need to look at the individual indices to assess broader trends. When that is done, the picture appears more complicated.

The biggest advance this week was the one by the Shanghai Stock Exchange Composite (SSEC), up 6.7% to 2,272 by early mid-afternoon local time Friday, down from an intraday and weekly high of 2,294. The SSEC's progress is remarkable since late October, when it bottomed closed to 1,700. From that bottom, it has followed a classic five-wave advance pattern that could easily bring it up to its medium-term resistance of 2,400, to which level I have pointed a number of times over the past weeks. A good argument can be made that that level, or up to 2,500, represents the top stretch of the current advance; if the current run surmounts it, then the next resistance is around 2,900, but there are no indications why it should advance so high as that.

The Australia All Ordinaries Index's advance this week of 3.6% still suggests its relative weakness. The All Ordinaries hit a low earlier this month just above 3,100 that exceeded on the downside its November 19 low of 3,483 and also the next day's intraday low just above 3,200. This index's chart from 2000-2001 suggests a strong resistance against upside breakout in the high 3,300s.

However, it is not entirely out of the question that the low this month represents the starting point for a multi-month bear market rally, should the international situation be fortuitous. In that case, higher resistances are at 3,728, and 4,287. Still, its current doldrums juxtaposed to the recent run in the SSEC would suggest that the latter is driven only by the government's domestic stimulus, or rather perhaps by expectations of its effects since it has not really had a chance yet to show its effects in the real domestic economy.

When we turn to the two relatively autonomous bellwethers, Tokyo and Seoul, we find that pattern of the former's Nikkei 225 more closely resembles the Australian index while that of the latter's KOSPI more closely resembles the SSEC, which has, however, significantly outperformed it since the end of January. It behooves the observer therefore to look more closely at the Greater China exchanges other than Shanghai, Hong Kong and Taiwan.

Hong Kong's Hang Seng Index has tracked the Australian index much more closely over the last three months than it has the Shanghai index, while the latter's Taiwan Stock Exchange Composite (TSEC) followed the Australian index up until the end of January, when it diverged upwards with a much better performance, more closely approaching the behavior of the Shanghai index although not doing as well as Shanghai in relative terms.

Among the other three markets usually covered here (India, Singapore, and New Zealand), only Singapore really can shed a little more light on the situation, although the Indian equity markets are never without interest. This is because Singapore sometimes follows the Australasian indices and sometimes the Chinese indices, while Mumbai has a logic of its own. The former's Straits Times Index has been very laggard, even underperforming the Australian All Ordinaries Index over the short-to-medium term, ie, not even showing the latter's relatively recent relative strength. The BSE Sensex 30, for its part, clearly traces the Australian rather than the Shanghai index, even underperforming the latter and indeed tracking the Straits Times index phenomenally closely over the last six weeks.

The main overall problem is that unknowns in the financial system do not promote confidence. While levels of technical indicators on Wall Street suggest that a multi-month bear market rally is under way in New York, those indications could easily be reversed by near-term moves. It would be an exaggeration to say that that trend is well established. Canadian markets have had strong gains on oil and gold, and other commodities including base metals have rallied, perhaps suggesting an intermediate-term low is in place.

As I have pointed out over the last few weeks, however, the possibility remains of one more leg down before a "real" bear market rally takes hold. If that takes place, technical indicators do not yet suggest how much further down the indices may fall: and in a bear market, such predictions are hazardous enterprises in any case.