DESPITE poor economic numbers all over the world, stocks are in play. How long this anomaly can last is anybody's guess, but there are a few observations or educated guesses that can be made.
First, volatility is set to remain high, starting in the West and spreading to this part of the world. Second, correlation among markets will remain very high, rendering diversification across different regions difficult, if not impossible.
Third, liquidity will remain low, adding to market risk. Fourth, market inflexion or trigger points will come in the form of central banks'/finance ministers' announcements; and in between these announcements, traders will probably go short at the first available opportunity.
That volatility has been elevated in the past 3-4 months is obvious - over on Wall Street, for example, daily triple-digit rises and falls for the Dow Jones Industrial Average are now becoming quite common. The same applies here - the Straits Times Index (STI) is quite capable of rising or falling more than one per cent per session.
Finance theory, however, tells us that high volatility or heightened risk shouldn't present too much of a problem because unsystematic risk (or non-market risk) can be diversified away by simply choosing uncorrelated assets when constructing a portfolio.
Problem is, markets have for the past three to four years since the Lehman Brothers' bankruptcy moved in tandem. Whether it's worries over US banks or residential mortgages or European nations, stocks in this part of the world have been held hostage to events in the West for longer than most local investors would care to remember.
Because of rising risk, investors who cashed out of equities are either sitting on piles of cash (our guess is that roughly one-third of players have opted for this) or have switched their money into bonds. The result has been low liquidity in stock markets across the world - on the Singapore Exchange, for instance, dollar value has been low for around four months now, notwithstanding the periodic churning of the penny segment.
All this suggests that this is a traders' market. Most of the time the STI moves ahead of the West - on Friday for example, it weakened in anticipation of Wall Street's slide, so although we'd expect some weakness first thing Monday morning, there's every chance that the sell-off won't be that bad if everyone starts anticipating a US rebound on Monday.
By now, most players would be familiar with the trading sequence - first, look at how Wall Street closed the night before; second, watch Hong Kong and the US futures market; and third, once Hong Kong closes, watch how Europe opens.
Even though markets and most investors know that bailouts so far haven't worked, the West's performance is still highly dependent on bailout announcements, whether they take the form of pronouncements from US Fed chief Ben Bernanke or meetings among eurozone leaders or finance ministers. It would therefore be a good idea for traders to constantly check what's scheduled for the week(s) ahead.
Finally, Bank of America-Merrill Lynch in its Global Economic Weekly said it sees downside risk to the US' already downbeat economic outlook.
"In our view, it is mainly a matter of confidence. The last several years have featured a number of false dawns. Each time the US economy looks better for a while, economists boost their numbers and start taking about 'take-off speed' only to see growth falter. Similarly in Europe, each time a new rescue plan is announced there is a period of optimism in the markets, only to see the crisis pop up again. This long string of false dawns is slowly eroding away confidence in the recovery."