The earthquake in China’s Sichuan province has resulted in huge losses in human lives. It is a tragedy for humankind but global stock markets staged a rally despite the many deaths being reported. What are the hot spots that we should be looking out for?

We should now be positioning ourselves in companies that will benefit from the rebuilding, especially construction-related stocks. Building materials will be in huge demand because of the massive amount of rebuilding needed.

A lot of Singaporeans have started donation drives to help the quake victims, in particular areas focusing of education. The collapse of the school buildings reveals the poor quality of the buildings as a result of corruption and I believe that it is time for the central government to weed out these people.

After an initial rally, the markets have started to show signs of weakness after the Dow Jones Industrial Average (DJIA) failed to clear the resistance at 13,000 points. Similarly, the Straits Times Index (STI) retreated after failing to go above 3,200 points. The Shanghai bourse, too, gave back all its previous gains.

To put it in a nutshell, there is still a lack of confidence after the STI fell from 3,700 in October last year to 2,700 this year. The total loss was 1,000 points but the index soon rallied from 2,700 to 3,200, recovering some 500 points in the process.

The Dow Theory, which is a century old, says that the initial rebound usually reclaims 50%-66% of its losses. Since the STI has claimed back some 50% of the 1,000-point loss, investors lack the confidence to pursue the rally and, thus, profit taking occurs.

Why is there such a huge rebound in a bear market? I believe that the rebound is giving the big players, who have yet to exit, a chance to get out.

In order for the big players to exit, there must be enough retail investors who come into the market. The big players will push up the prices, lure retail investors into the stock market, and sell to them at high prices. It is this reason that is pushing the STI from 2,700 to 3,200. Cold hard cash is needed to carry out this exercise.

However, prices have climbed too fast and too high, making it hard for retail investors to continue chasing the stocks. If retail investors do not come in, then how can the big players unload?

The big players have no choice but to let the stocks correct to an attractive level. There will be another wave of buying to 3,200-3,300.

There are risks involved in either buying or selling at these levels, especially when the index is locked in a tight trading range. We should be buying on dips and selling the stocks when the STI has risen by about 200 points. The best way to catch the bull is to stay optimistic.