News / Inter Market Analysis

Will a dead cat bounce? By Fitz Aclan July 16, 2008

We saw the local equity market getting some sort of reprieve with the recent technical rally after dropping the way it did for the past several months. We saw that the market bottomed out at around 2,280.

As a point of explanation, a technical bounce in a bear market is fondly called by traders for some reason or the other as a “dead cat bounce.” And clearly that is what we saw when the market rebounded from the 2,280 low.

With the market dropping already more than 30% from its highs in October of 2007, a “bounce” is indeed to be expected. If you drop a dead cat high enough, as the saying goes, the higher it bounces. It’s all really about elementary physics. And the sound is more of a thud than a “boing.”

The main question that concerns us now is whether the market has enough “legs” to eventually recover in a big way and reverse the current bear trend. Or is this just a thud more than a “boing?”

Looking at the technical side, it is clear that the market needs to break the resistance level at 2,900-3,000 to prove any technical argument that the market has indeed reversed its downward trend. To me, that resistance level is a very powerful trend line. This level is the main resistance point which the market failed to break when the market was threatening to rebound at the start of the year. In short, the market right now has to prove it has enough strength to carry itself in a run up. I think this is the level everyone should look at if and when the market indeed rebounds.

Meanwhile, the fundamentals are just as shaky. The situation in the US markets is still very uncertain with a lot of questions particularly in the US financial sector. This is related to the possibility of more write offs now amid concerns regarding the financial health of Fannie Mae and Freddie Mac.

To compound the problem, crude oil prices continue to move higher as it is now hovering again near the US $145/bbl, which we all know is an all-time high. This behavior of crude oil is reinforcing inflationary concerns.

With the situation of markets outside our own still indicating risk aversion among major investors, any rally in the domestic market can still face some selling pressure at some point in time. Right now the technicals indicate a maximum upside of 2,700-2,800 if and when a rally occurs.

For the coming week, investors globally will watch the CPI and PPI numbers. These will signify whether the US Fed will eventually raise US interest rates by the end of the year as the consensus forecast shows.