Singapore: Is the STI heading for 1000 or is this the golden buying opportunity? Oct 19, 2000
|
INTRODUCTION: Could the STI see the 1000 level in the next six months? It is no longer unthinkable if it gets to perhaps the 1600 to 1400 level before the end of the year. In this map, we examine how the market has been set up for such a scenario, and the driving forces that may take us there. The underlying simplicity of the logic is frightening. Generally, the more complex looking maps are more stable than simple looking ones in the same way a more complex and advanced ecosystem is able to repair and restore itself better. For the first time, we will also show how we apply Chaos/Complexity concepts and Scenario archetyping to this simple example - some very useful tools that help us navigate this map. Take a look at the recent history of the STI index below. The three yellow circles show a head and shoulder pattern, which is cause for some near term nervousness of the Singapore market.
Chartists may be preparing themselves for a dreadful fall in the market by accumulating short positions. Some are even suggesting that the market may test the 1000 level. In this article, we will discuss the short-term forces bearing down this market. It is also an excellent opportunity to explain how we apply Chaos concepts and scenario archetypes to the financial markets. Some necessary preliminaries before we get going. Even if everybody on this planet believes that the sun will not rise tomorrow, it will still be there to greet us the next day since the laws of nature has no connection to our belief. But in the financial markets, if enough people belief a lie, the market will assume the lie to be true, i.e., if a significant number of investors share the foreboding nature of this "head and shoulder" pattern, this market will collapse. The strong underlying fundamentals of the real economy do not count. Belief is truth, or as they say, "the market is always right" and in the long run we are all dead. In applying scenario techniques to understand financial markets, we look for set-ups, which may lead to several archetypes of which the self-fulfilling prophecy we will be explaining here is a simple case. By mapping the driving forces, we will show that in taking a position on the Singapore market, the price patterns should not be the focus as they are just serving as a context for balancing risk and reward. |
Maps
Partners
|
|
|
|
|
(Fig 2) As long as software prove to be adequate in replacing expensive human delivered services, it will discourage investment in bricks and mortar operations (box 3). If the market still has not crashed, then it is only because the critical mass of bears has not appeared to sell down the market. The dynamics of how this come about is almost identical to adding grains to a sand pile. The pile can get extraordinarily tall without collapsing, then somehow one more innocuous grain causes the whole edifice to come crashing down. The sand pile phenomenon is frequently used to illustrate the fragile or nonlinear nature of stability in Complex or Chaotic systems. Faced with a "head and shoulder" formation are three groups of investors. The believers or bears (box 2), those sitting on the fence (box 3) and the unbelievers, e.g., bottom up stock pickers (box 4). The population of believers (box 1) is our sand pile. The ranks of the unbelievers (box 3) joining those in box 1 are the grains we are adding onto that pile. Some from box 3 may choose to join the unbelievers (box 4). If box 4 attract away too many members from box 3, the sand pile will not collapse (i.e., the market will not collapse) and vice-versa. At this moment, the split of investors joining the believers (box 2) and unbelievers (box 3) are determined by the growing risks factors box 3a and 3b. If there is an unexpectedly cold winter, if the Middle East conflict worsen or the earnings growth momentum slows for US companies, then the ranks of believers will swell, which means that the marginal "grain" that will appear to cause the collapse of the sand pile, i.e., stock price is extremely high. At the risk of repeating ourselves, the "head and shoulder" pattern is only creating the circumstances for a collapse. It is foolhardy to short the market without also evaluating the drivers from box 3a and 3b.
|
|
|
(Fig 3) As you know prices are not decided by investors calling out their prices at once. Instead market prices are determined sequentially, and as the broker would often remark over the phone, "it is in the queue". That is why the analogy of dropping grain by grain on a sand pile is appropriate. Each investor shorting or selling the market is equivalent to adding sand to the sand pile, which can only hasten its collapse. If they would only choose not to believe (sound impossible) the chart pattern, i.e., there is no sand pile, how then can there be a collapse? By living their bearish belief, investors have created a self-fulfilling prophecy for a crash (box 5). Note that this is not a case where if more people believe the market will come down, it will happen. Rather if enough people think so, even if they are the minority, it will happen. Because as we explained earlier, stock prices are determined sequentially. Previous transacted prices affect future prices. As for the Singapore market, who knows if there are sufficient believers? To increase the chance of success, a way must be found to manage this risk. Often this lies outside investment strategy, which is the mainstay of this site. The challenge is addressed in the trading strategy. Even in this simple example which the market has offered us the opportunity to illustrate some of our technology, the sand pile metaphor is inadequate. Unbelievers of a crash, if there is enough of them, can bring the prices back up (box 4). That is why deep and liquid markets like the NYSE do not crash so easily. Relative to history, the US markets have never been as deep and liquid. As a result, it keeps growing bigger since it offers a huge risk advantage over the numerous small markets. |
|
|
(Fig 4) Assuming we are now in year 2001. We would know by now if there was a severe stock market correction in Singapore last year (blue box 1a), or there had been sufficient unbelievers to prevent the market from seeing the 1000 points level (blue box 1b). Alternatively at 1400 to 1600, investors may start buying, forestalling the dismal scenario. What will happen depends on box 3a and 3b, which we will take up as separate maps. The "head and shoulders" pattern would have just been footprints in our financial history (as dotted lines from blue box 1a and 1b to box 1). Returning to the present, after weighing the balance of risk and reward, we are bearish on the Singapore market. But we want to caution investors that short-term action in the market requires lots of experience to execute successfully. Reading the market correctly would not be good enough. You would also need an adequate trading strategy that is compatible with your temperament. For the non-professionals, we are referring to stuff like psychology, position sizing, timing, quantitative risk management etc.,
|
|
(Fig
1) Technicians help to create the setting for the market to collapse
observing the "head and shoulder" pattern (box 1) as the cue to short
the market. Whether the market deserves to be treated this way is not
the issue. Pure chartists, well only look at charts. So the constituency
of technical analysts have cast a bearish vote (box 2).
