In the previous issue of Shares Investment (Singapore), I mentioned that both the Dow Jones Industrial Average (DJIA) and the Straits Times Index (STI) were locked in a tight trading range, with a lack of fresh catalyst helping both indices to break the deadlock.

Not that the subprime mortgage mess has been cleared, but trading sentiment has definitely improved by leaps and bounds.

For a start, corporate earnings announced by major US companies did not give investors any nightmare as initially expected. Even the losses reported by Citigroup and Merrill Lynch, were not as bad as expected. This spurred a market rally.

Investors have now braced themselves for an end to the subprime mess and, thus, are more than ready to jump back into the market as long as bad news are not overwhelmingly bad. After all, it has been more than six months since global markets peaked and we have been treated to nothing but bad news and a sliding market.

But be warned that nothing is really over because write-offs will continue to surface as long as the US economy does not recover. We really need the US economy and the job market to recover so that housing prices do not fall any further because falling home prices will force lenders to write down on the value of their housing loans and could lead to even more delinquencies on the part of the borrowers.

I am still a cautious bull because I believe that the bull market is still alive, but we need the US economy to get back on its feet before I am convinced that we are in a sustainable rally. For now, I have set a 3,300 target for the STI and 13,000 target for the DJIA.

DOWJONES INDUSTRIAL AVERAGE
At the time of writing last issue’s article, I mentioned that we will see some short term weakness. Two weeks ago on the same day, the DJIA stood at 12,527 and went down to a low of 12,269 before a strong rally pushed the DJIA to its latest high of 12,894.

Although the DJIA has yet to stay firmly above 12,800, a break above this level is seen as important because three previous attempts to hurdle over this level failed miserably.

In the short-term, the DJIA is likely to trade 12,600-12,800 from a more cautious angle. However, should the DJIA continue to rally to 13,000, it could go as high as 13,500 in the short and medium term.

On the other hand, a break below 12,500 will once again provide chartists with excuses to sell but this is unlikely to drag the index any lower than 12,400.

STRAITS TIMES INDEX
This is one of the best performers in the Asian region - thanks to stronger than expected first quarter gross domestic product and a growing economy despite US weakness.

In the previous issue, I specifically said that the STI will, from 3,089 on 9 April, move down to cover the gap at 3,046, which it finally did on 14 April.

From 3,046, we are now trading above 3,200, which is 50 points above the previous resistance of 3,150.

We have not broken out of the trading range and the STI is trying to reach the next resistance at 3,300 but, as mentioned earlier, this is not an easy resistance to clear because it was an important support level that was broken when the index tumbled.

Should 3,300 be broken, we can expect the STI to go towards 3,500.

SHANGHAI COMPOSITE AND S-CHIPS
The Shanghai Composite Index (SSE) reached a peak of 6,124 in October last year. The index has been sliding without a meaningful rebound since then and it reached a recent low of 2,990 on 23 April before closing at 3,147 on the same day.

This looks like a key reversal and a rebound off the 50% Fibonacci Retracement level.

If we add these technical indicators to the news that the Chinese government has decided to reduce the 0.3% stamp duty to 0.1%, I believe that the SSE still has a lot of room for upside.

Why should the SSE rally when the stamp duty is cut by a mere 0.2%?

The significance lies in the fact the Chinese government, who used to warn that the stock market was too high, is now ready to take measures that will boost the stock market. Previously, the Chinese government was only more than willing to talk down the market and adopt measures that will cool the economy.

We should see a lot more upside for the SSE, which should also augur well for the S-chips listed here on the Singapore Exchange.

I have been a firm believer of China stocks listed on the SSE even when these stocks were badly battered just a couple of months back. I advised investors to buy into fundamentally sound counters and not to give up on these stocks because valuations back then were too low and I believe that funds such as QDII will come in to support these stocks as long as valuations are reasonable.

Continue to follow S-chips, as they will be in focus this year.

Disclaimer: Opinions expressed in this article are solely those of the author and do not represent the opinions of this publication and/or the opinions of the organisation he represents.

Straits Times Index heading towards 3,300