Tuesday, September 11, 2012

Eurozone on the mend?

The recently announced bond-buying plan by ECB (simply called OMT) and the long-awaited announcement of the next phase of unconventional monetary policies by the Fed (simply called QE3) have resulted in a rally in precious metals, such as gold & silver. We can see from Chart 1 below that gold has broken above its descending triangle at USD1670. From Chart 2 below, we can see that silver has broken above its 18-month downtrend line at USD32. The upside breakout in gold prices could signal the continuation of the prior uptrend; thus, a good trading BUY on gold.

Chart 1: Gold's weekly chart as at Sep 10, 2012 (Source: Stockcharts)

Chart 2: Silver's weekly chart as at Sep 10, 2012 (Source: Stockcharts)

When you compared DJIA and the Top100 European stock (as represented by EUR Index), you can see that the upside on US stocks is limited unless the index can break above the strong horizontal resistance at 13300. On the other hand, EUR has broken above the 18-month downtrend line at 220- which may signal the end of the intermediate downtrend. If EUR can break above the strong horizontal resistance at 230, this index could start on its upleg. While both US & European stocks need to overcome strong resistance, the fact that US stocks are trading near its recent high while European stocks are recovering after a sharp drop, would mean that European stocks could present better investment opportunity for investors. See Chart 3 & 4 below.

Chart 3: DJIA's weekly chart as at Sep 10, 2012 (Source: Stockcharts)

Chart 4; EUR's weekly chart as at Sep 10, 2012 (Source: Stockcharts)

Finally, I have appended below the charts for USD & EURO. When Eurozone problem was at its height, investors shifted from EURO to USD. We can see the uptrend in USD & the downtrend in EURO. Over the past 6-7 weeks, these currencies had corrected substantially. We can see that USD had broken below its uptrend line while EURO had broken above its downtrend line. As the European nations re-commit themselves to EU to resolve the Eurozone problem, I expect EURO to continue to strengthen.

Chart 5: USD's weekly chart as at Sep 10, 2012 (Source: Stockcharts)

Chart 6: EURO's weekly chart as at Sep 10, 2012 (Source: Stockcharts)

While it is too early to call the end of the Eurozone crisis, we have seen that the market had reacted positively to the latest development. This could result in some portfolio re-balancing, away from the high-flyers (like US & Malaysian markets) to European markets. One particular group of stocks that I am quite worried about are the high-flying consumer stocks, which were steadily bought up by foreign funds. Some profit-taking has just begun.


steve said...

Very good comments. Thanks Alex!

Mat Cendana said...

Now that you've mentioned it, investing in precious metals (besides the stockmarket) could potentially bring in significant profits in the near future.

Besides the Eurozone's bond-buying plan, it looks ever more likely that Bernanke will be forced to unleash QE3. That's because the numbers - especially on employment - don't look good. What else can he do even if the effects of QE3 will probably not do much for the longer term? That appears to be his only tool at the moment. Unless if the US politicians can be persuaded to undertake better fiscal discipline, which is unlikely.

It doesn't take a genius to foresee what will be the effect on precious metals when more money is added to the system. In all probability, the previous high of US$ 1,900-something will be broken. From then onwards, we will be looking at gold with the ` new normal' price of above $2,000. Ive diversified into investing in gold too - had started with physical but it will also include trading. If it gets below $1,700, that's the time to buy in anticipation of QE3.

steve said...

Bonia offers MGO but says no intention for privatization. What does that mean? So as a minority shareholder, we don't have to take the MGO offer to sell our shares?

Thank you!

Ethan Lee said...

Hi Alex,

Can you comment about Airasia slide on last few day?

Currently RM2.84. Worth to buy?

Thank you.

Alex Lu said...

Hi steve

I am not following the Bonia's GO story. The company is profitable with EPS of 20 sen. At current price of RM2.30, it is trading at a PE of 11.5 times. It is also resting on its uptrend line at RM2.25.

Based on steady growth, good technical outlook and management's confidence in the prospect, Bonia looks like a good stock.

The GO is an unconditional GO, which means that if you accept the GO, you are out of the stock. This is different from conditional GO where your acceptance is conditional upon a certain level of acceptance received by the offeror. If that level falls short, the offeror can choose to return your shares to you.

Since the major shareholder of Bonia has communicated that he wants to maintain the listing, if you want to remain invested in Bonia, you can choose to not accept the GO.