I mentioned in the previous issue that the Straits Times Index (STI) has broken out of a tight trading range, with the index possibly rising to challenge the 3,300 resistance.

Things have definitely changed for the better - sentiment wise - but I still maintain that nothing has changed when it comes to economic fundamentals.

We have all come a long way since the STI twice threatened to break the 2,746-support but we all held our nerves and rode out the volatility and bloodshed. Readers who have been following my articles would know that I was still hopeful even at 2,746, with a preference for, first - the blue chip stocks, followed by the S-Chips or China plays.

Looking back, I was, and still am, optimistic because I steadfastly believe that the series of rate cuts by the US Federal Reserve would ultimately revive the ailing US economy because no Bull Run in the past 50 years had ended when the Fed was cutting rates.

I was also a firm believer that there is ample liquidity - Asian funds, Middle East funds and sovereign funds - to support the market. Lastly, the strong Asian economy, which has seemingly “decoupled” from the US economy, forms the third and the last pillar that supports my views that the market was and is still not dead.

Here we are, from 2,746 to nearly 3,250 - an almost 500- point jump or about 20% rise from the low primarily due to a big change in stock market sentiment. Allow me to reiterate once again that US economic fundamentals have not changed and I am still waiting for signs to appear that the US is back on the recovery path.

SOME POSITIVE SIGNS

As a matter of fact, we have seen some signs that the US economy is not as bad as some people have painted it to be. For a start, first quarter gross domestic product did not tank, which means that the US did not fall into a recession during the first three months of this year.

Although some American economists argued that the revised figure should see the GDP figure fall into negative territory, nobody was expecting a growth in the first place and, thus, a negative figure should not be seen as a huge surprise.

Secondly, unemployment data showed a positive surprise when job cuts were less than expected and that unemployment fell to 5% from 5.1% - a sign that employers are still willing to hire despite the doom and gloom in the US economy.

While most of us were expecting first quarter earnings to tank, the majority of the US corporate bigwigs - with the exception of companies in the financial sector - continued to spring positive surprises with better-than-expected results. Some companies painted a better outlook going forward but a lesser number of companies guided towards a bleaker future.

DOW JONES INDUSTRIAL AVERAGE

Last issue, I said that “although the Dow Jones Industrial Average (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”.

Now that the DJIA is firmly above 12,800, this level has become an important support level that we should all look out for. Although the index flirted with the 13,000 psychological resistance for a while, it seems that the market is not ready to push the DJIA above this level on lack of fresh impetus.

Nevertheless, I believe that the DJIA will push through 13,000 sooner rather than later due primarily to the feel good factor of a second-half recovery. During the week from 5-9 May, the DJIA showed good strength, taking two steps forward and one step backward, in a bid to consolidate for the next push beyond 13,000 and towards 13,250 and 13,500.

Despite rising from 11,750 to 13,000 over the past few months, healthy intra-day and short-term corrections have helped to avoid the DJIA daily charts from moving into overbought regions. In the short-term, there is still some more room for upside while I expect a correction to take place once the DJIA reaches the 13,250-13,500 region.

STRAITS TIMES INDEX

The STI has displayed tremendous resilience despite three days of minor correction over at the US.

Not only did the blue chips show strength, but the broader market, too, gained on strong local and regional performances.

Now that the STI is near 3,300 - even though there are strong signs of selling whenever we go near 3,300 - I expect 3,300 to be broken soon. Unfortunately, this is unlikely to happen without a short term correction that could take the STI to 3,185-3,150.

I feel that 3,150 should hold and the STI should resume its uptrend once the short-term recharging is over.

I now see the STI reaching 3,450-3,500 by the end of this month if nothing bad and out of the blue happens from now till then.

STILL A CAUTIOUS BULL

I do not want to appear to be a longwinded old nag, but I still have to warn that we are not entirely out of the woods due to the fragile state of the US economy.

I know that Alan Greenspan and Warren Buffett have both said that the worst could be over and that this recession is short-lived, but we all know that things in the US can blow up in our faces just overnight.

I am still waiting for more good news to appear before declaring that the bear is dead. More importantly, I will be worried should the STI fall below 3,150 and even more worried if the DJIA comes down to 12,800. These could lead to more corrections, but not yet enough to derail the bullish trend that we are used to for the past few months.