This headline paints a picture of doom and gloom for the stock market in the first two weeks of August. Although it is not all doom and gloom, most investors cannot help but feel this way because there have been no reasons thus far for investors to cheer about – in spite of the start of the Beijing Olympics and Singapore’s National Day on 9 August.

There were talks that China stocks, especially those related to the Beijing Olympics, would get a boost from the quadrangle event, but talks remained talks as the opposite occurred.

As for the National Day rally, which always seemed to occupy the minds of retail investors whenever 9 August draws near, it is a case of hoping against hope. We have not seen a National Day rally in the stock market for many, many years.

In the last issue of Shares Investment (Singapore), I mentioned tongue-in-cheek that the months of August, coinciding with the start of the Lunar Seventh Month or the Hungry Ghost Festival, have never been kind to investors. We were treated to another bout of sell down during the previous fortnight – one that was rather unexpected and “unexplainable” particularly when the US market enjoyed a rather good rally.

The Hungry Ghost Strikes Again

Could it really be the Hungry Ghost Festival? Could this explain why the US market rallied while most Asian markets tumbled? A simple and straightforward NO is the answer.

The start of the Beijing Olympics coincided with the start of the mini meltdown, as I suspected that the threats of acts of terrorism could have spooked investors into dumping Chinese shares. It was reported that terrorists had threatened to act during the Olympic Games in Beijing and investors reacted swiftly, preferring to sell first before anything bad could happen.

It was then suggested by market observers that the end of the Olympics could also signal the start of the Chinese government’s relentless efforts at taming inflation, which has hit a record high. Also named as one of the culprits was a slowdown in the Chinese economy immediately after the Olympics, as it is believed that consumption and government spending would slow significantly after the showcase event held in Beijing.

Most importantly, it is now a fact that Asian economies are not as immune to a slowdown in the US as it had been earlier expected. Japan’s economy slowed in the second quarter of the year while Singapore has officially lowered its economic growth forecast from 4%-6% to 4%-5%. Coupled with an expected slowdown in China’s economy, Asian markets have finally realized that it could no longer hold up in the face of a weaker economic environment.

From the first trading day of August to 13 August, the Straits Times Index lost about 100 points (3.4%), the Hang Seng Index shed 1,222 points (5.4%) while the worst-performing market – the Shanghai bourse – plunged more than 12%! On the other hand, the Nikkei stayed flat after a rally, only to fall back to origin on news of an economic contraction.

The US Economy/Market Could Have Found A Bottom

Since July, we have witnessed a rather decent rally in the US market after the US government gave its assurance that it would “rescue” Freddie Mac and Fannie Mae should either of both these companies go belly up.

This reassurance injected a belief that the US government would step in as soon as there are signs of trouble and that it would put up a rescue package no matter how huge an effort it would require. First, it was Bear Sterns and then now Freddie and Fannie, which means that the uncertainty on the possibility of a corporate failure has effectively been removed.

Not even the recent writedowns by JP Morgan and the huge losses incurred by UBS could unsettle the market although it did cause some corrections but only because the US market had rallied prior to the bad news.

The effects of the rate cuts have yet to be felt while the tax rebates returned in the form of cheques have boosted consumer spending in the month of June. Although consumer spending slowed in July, there was still growth and it was compared to “an artificially boosted spending power in June” as a result of the tax rebates.

Meanwhile, falling crude oil prices have led to a rebound in the US market but it had little effect on Asian markets simply because Asia has just started to feel the effects of a US-led slowdown. However, it is believed that oil could have entered a bear market as it has fallen more than 20% from its peak (Fig.1).

From a peak of more than US$147 per barrel, oil fell to nearly US$113 before rebound on 13 August. A fall below US$110 will more or less confirm that oil’s Bull Run has ended while a spike above US$130 will negate this view.

Straits Times Index

The STI has largely tracked the performance of the Hang Seng Index, which takes its cue from the Chinese bourse. As a result of the poor performance in North Asia, the STI is now threatening to test the strong support at 2,746 (See Fig.2). If this support is broken in the near-term, which I believe is unlikely to happen, we are in for big trouble.

The STI needs to reclaim 2,900 by the week ending 22 August and then reclaim 3,000 by the end of next month in order for the bulls to jump into the market. This could be supported by the fact that in the past decade, falls in the early parts of August have usually been followed by strong rallies towards the end of the month.

Should this really take place, then we should see the STI going back to 2,960 by the end of this month.