Smart Investing/Trading for the week ending Feb 29 2008

Weekly US Markets Update and Outlook (Source:MarketWatch)

U.S. stocks enter new month on uncertain footing

Down performance in February puts stocks in the red for year-to-date

U.S. stocks will enter March on uncertain footing next week, with a sell-off Friday marking the fourth consecutive month of declines for a market that remains plagued by the credit crisis and an uncertain economic outlook.

"Since early October, the market has been largely declining, signaling one of two things," said Hugh Johnson, chairman of Johnson Illington Advisors. "Either we're in a bear market and entering recession or we're having a correction accompanied by a slowdown." "Either way, the trend as we start March is not good," he said.

February ended Friday with the Dow Jones Industrial sliding 315 points, or 2.5%, to 12,266. Insurance giant AIG led the losses, falling more than 7% after posting its largest loss in almost 90 years of business. With the credit crisis claiming new victims almost daily, investors had placed their hopes on a bail-out plan for ailing bond insurers Ambac, but a deal seemed uncertain by Friday.

The S&P 500 index fell 37 points, or 2.7%, to 1,330 Friday, while the Nasdaq Composite gave up 60 points, or 2.6%, to 2,271. Among tech stocks, Dell led the way lower, as the PC-maker posted a 6% drop in profits. "There was also a report out mentioning that write-downs for financial institutions could total $600 billion, which is adding another layer of uncertainty for money center banks and the market," said Robert Pavlik, chief investment officer at Oaktree Asset Management.

Jobs on the line

Another week full of key economic data awaits investors, with the all-important February jobs report on tap for Friday. The January jobs report had revealed the first contraction in employment in more than four years, seen by many as perhaps the smoking gun revealing the economy has entered a recession. Ahead of this, investors will sift through February data on manufacturing on Monday, the service sector on Tuesday, and productivity and costs on Wednesday.

Inflation

With a continuing stream of bad economic data and promises of lower rates from the Fed last week, the dollar sank to a new low of $1.5239 against the euro, and dropped to a three-year low of 103.66 against the Japanese yen. A weak dollar tends to fuel the price of dollar-denominated commodities, which become more affordable in other currencies. This, along with supply concerns and geopolitical tensions, also helped lead crude-oil prices to a new record above $103 a barrel. At the same time, the price of gold also hit a new record above $978 an ounce, bringing the precious metal within reach of the key $1000 mark.

Economists and investors are concerned that a surge in commodities prices, compounded by the Fed's rate cuts, will boost inflation later this year, raising the specter of stagflation for the economy. But according to Johnson, investors are flocking to commodities for the same reason they are also pouring money into government bonds: to find a safe-haven from all the current market uncertainty.

Weekly KLSE Update and Outlook(Source: I Capital)

The KLSE CI is below its 30-day and 50-day but above its 50-week moving averages. Both its daily DMI and MACD are in bearish territories.

This week's I Capital updates the daily KLSE Composite Index. Its weekly MACD and DMI are also mirroring the bearish signals from the daily indicators that are flashing signs of further correction on the KLCI. Moreover, it has now broken through the neckline of the head and shoulders formation, indicating that the support has turned into resistance. The local situation is fluid, as investors stay cautious ahead of the general election. However, the recently released GDP growth of
7.3% in the fourth quarter last year shows that prospects for the local economy remain favourable. So, an overdue correction rather than a bear is seen.

Over the next few months, the KLSE faces more corrections, irrespective of the election result. The Jan plunge that hit many stock markets bypassed the KLSE. Now it is the turn of the KLSE. At the same time, as crude palm oil price continues to surge, remember this brings it closer to a bubble and an eventual correction or decline. The rise in palm oil price is getting to be parabolic.