New High for the STI

The Straits Times Index (STI) reached a new high yesterday (Thursday 27 Sep) at 3714.77. Since the US sub-prime mortgage problems hit our stock market in August when the STI dropped to 2,962.01 on August 17, STI has recovered over a span of slightly over a month. This is spectacular turnaround.

 

The stock market analysts attributed this to the good macroeconomics of the Singapore economy and the expressed willingness of the major central bankers to take actions to reduce the credit crunch in the financial markets of the world. The half-percentage point cut in the Fed interest rates on September 18 kick-started the rise of the stock markets, Singapore’s included.

 

Market analysts also said that yesterday’s STI rise was due largely to “window dressing” – parties with vested interests propping up share prices to make themselves look good at the end of the third quarter. (Source: The Straits Times, 28 September 2007). The quarter-end effect (including semi-annual year-end, year-end) is quite well documented when stock prices tend to spike upwards just before the close of that month. Fund managers holding on to blue-chip stocks in their portfolios may buy in additional stocks of the same companies at month-end in order to achieve a better pricing for their stocks in their portfolios. This so as to report better performances of these funds to the unitholders.

 

What will happen to the stock market when we move on to October? The pressure is off the fund managers and they will then go on to buy and sell stocks in order to realise gains and reduce losses. At the end of the day, if you are not an active day-trader, you need not bother about this kind of stock movement at quarter-ends. If you invest in value stock, the fundamentals of the company and the economic environment the company operates in are still better gauge of the underlying value of the stock.

 

The sub-prime mortgage problems of US have not disappeared. It will have to get worse first before a recovery can surface.

 

Written on 9/28/2007 1:54 PM

 

Copyright © 2007, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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