We found an intermediate bottom when the Straits Times Index (STI) reached a low of 2,746.73 on 22 January. The market rallied strongly to 3,168.23 three days later before retreating back to 2,850.

Trading sessions have been volatile with a weak inclination due to the worsening US economy. Jobs were lost and the number of people who are no longer able to pay for their home mortgages increased significantly. Bad news, such as the 63,000 jobs lost in the month of February, has been the worst in several years.

China’s economy still expected to be strong

The weak data seems to suggest that the US economy is already in a recession, although we have yet to hear a firm confirmation from either Federal Reserve Chairman Ben Bernanke or President George Bush.

Rate cuts have, so far, done nothing for the US economy while liquidity injections into the global financial system have failed to lift market moods. On 11 March 2008, the US central bank, together with other central banks in the world, injected US$200b into the financial system. The initial response was a 416-point rally in the Dow Jones Industrial Average (DJIA), which lost ground the following day.

The lack of a follow-through, unless it happens within the next few days, is a sign that the market wants to rally but require a fresh catalyst to do so.

There is a distinct lack of confidence in the US economy and stock market, which has dampened trading moods in Asian bourses. Despite the 416-point jump in the DJIA, the STI rose only slightly more than 50 points while the broad market was very weak as most other stocks - apart from the blue chips - fell.

SOME SAY IT’S A PERFECT STORM
Some market observers believe that the global financial markets are heading towards a perfect storm - one that is comparable to the Great Depression in the 1920’s due to the extent of the number of foreclosures in the US housing market amid a weakening US economy.

It was reported that more than 900,000 homes have been reported to being unable to service their monthly mortgages while another 300,000 or so have been late in making mortgage payments. Although efforts have been made to prevent foreclosures, it only serves to prolong the pain and not solve the problem.

With the US economy still weak, the problem can only get worse and not better, leading to more foreclosures. When homes are being repossessed and auctioned off, it will add to more selling pressure in the housing market while existing home inventories remain in the market unsold. Unless the US economy strengthens and jobs are gained with pay increases, homeowners will continue to face problems.

It is funny how oil prices have climbed to a record US$109 per barrel despite a weak US economy. Where is the demand coming from when the US consumesabout half the global supply per day? Some blame it on China and India, but China only consumes about 20-odd percent of global supply.

If we were to split demand into real and speculative demand, then it is likely that the latter is responsible for pushing up oil prices. And when we add rising commodity prices to rising oil prices, then we can expect inflation, which is now a global problem, to remain high. Food prices, energy prices and overall standard of living are rising rapidly amid the possibility of the US economy dragging the whole world into a slowdown.

The winners in such a scenario are, of course, people who push up commodity prices, short sell stocks and attack the US Dollar.

WILL THE RATE CUT HELP?
In all honesty, the bulls are banking on the rate cuts to rescue the US economy because, apart from this, there is really little else that can cheer the markets and give a boost to the ailing US economy.

The effects of the rate cut are usually felt six months later and, thus, the full effects will be felt in the second half. There are worries that the Fed was behind the curve in reducing rates, resulting in the weak US economy.

ALL IS NOT LOST
Asian bourses have yet to decouple from the US economy but it seems that Asian economies are no longer as dependent on the US economy as it was before. Despite an expected contraction in the US economy in the first quarter, Singapore is expected to post a 5.7% growth in the same quarter.

Similarly, the Chinese economy is still expected to be strong but inflation has become an important theme in China. It is for this reason that investors are selling shares of China-based companies listed here on SGX despite attractive valuations.

As mentioned in previous articles, there is ample liquidity in the market looking for an excuse to get off the fence and jump back into the stock market. This should provide some support for the weak market.

Technically, the STI should be able to hold above 2,746 while the DJIA should stand above 11,600. I will only be worried when these two technical levels are breached. Meanwhile, investors should look at blue chips whenever there is a correction.