In the previous issue of Shares Investment (Singapore), I mentioned that falling oil prices could have the effect of sparking off a rally.

During the past fortnight from 16 July onwards (I always write on Wednesdays nights), the Dow Jones Industrial Average jumped from a low of 10,918 on 16 July to a high of 11,698 on 23 July before retreating back to 11,100. At the time of writing on 30 July, the DJIA has risen back to 11,500 after oil prices fell even further, first from US$146 per barrel to US$134 per barrel to US$120 per barrel.

Bye Bye Oil Bull?

Is the bull market for “black gold” finally over? At least, that is what the OPEC President thinks when he said that crude oil will probably fall to US$70 per barrel.

The daily charts (Figure 1) seem to support the argument that oil prices may head towards US$70 per barrel but definitely not in the short term. There are support levels at US$121, US$110 and US$100.

The monthly chart (Figure 2), however, is still in a bullish mode unless drastic events occur that will take oil prices swiftly below US$120 per barrel followed by US$110 per barrel. Should this happen within the next two months, we can be pretty sure that oil prices would be in for an extended fall.

As it is, falling oil prices have already hit palm oil stocks, which I have been bearish about since mid-June. I am still not a buyer of palm oil stocks – not even Kencana Agri – although valuations might look cheap because falling palm oil prices will be reflected in future earnings.

STI Rally Lacking Conviction

Since 16 July, the DJIA has risen from 10,918 to 11,500 (not taking into the highest point during the fortnight), or 5.3%, within these two weeks. The Straits Times Index, however, rose from 2,819 to 2,925, or a mere 3.7%.

In other parts of Asia, the Hang Seng Index jumped 8.1% from 20,988 to 22,690 while the Nikkei 225 rose 4.8%.

The only reason for the local bourse’s weak performance is probably due to lack of institutional participation, as fund managers have not been buying aggressively. Most are either trading short-term plays or nibbling at the more defensive stocks.

During the past fortnight, it has been noted that the local market has been “up one day and down the next day”, suggesting that traders are more than happy to trade intraday or take profit the very next day when gains seemed short-lived.

Here Comes The Hungry Ghost

Market talk has it that the Lunar Seventh Month, or the Hungry Ghost Festival, has never been kind to investors.

Could it be the doing of “the beings from the netherworld”? Could it be the August-effect that builds a solid foundation for a year-end rally?

I do not believe that “beings from the netherworld” have got anything to do with the stock market because only a few Asian countries celebrate the Lunar Seventh Month. This Chinese superstition is not celebrated by investors in Europe and US and, thus, it is unlikely that the markets will be affected.

Although I do celebrate the Hungry Ghost Festival, it is hard to accept or even believe that the stock market here will be hit every August when “the beings from the netherworld” are being released into this world.

However, I cannot offer any explanation why August is usually bad for the stock market as the past decade has shown that this month is unlikely to be kind to investors. From 1998 to 2007, there were only two years – 2000 and 2003 – when stocks rose in the month of August.

On the other hand, there were four years when stocks fell in the month of August while the remaining four years were flattish in the months of August. Strangely, the flattish years were not exactly flat as there were huge volatilities in the months of August. In all four years, it started with the markets falling quite drastically before staging strong rallies to close the month flat.

What about this year?

With oil prices falling and the US government jumping onto the rescue raft at every instance of a crisis at financial institutions, the stage is set for the rally to continue.

Meanwhile, the unexpected job gains in the private sector seem to point to a recovering economy but housing prices, which continue to fall, counteract any good news that may come from the US economy.

Stay glued to the television for the non-farm payroll and US unemployment rate due on 1 August. Should the numbers surprise on the upside, coupled with even more falls in the oil price, it should help the DJIA clear the 11,600-resistance.

As for the STI, 3,000 looms while 3,150 will be a tough nut to crack.