Yes! It seems that the Straits Times Index (STI) has finally broken the Chinese New Year jinx that has been gripping the stock market for six consecutive years prior to 2012 which is, coincidentally, the Year of the Dragon.

Was the Dragon responsible for exorcising the demon? Has our local market finally shaken off the jinx that hit investors pre- and post-Chinese New Year in the earlier years?

We are a week away from the Chinese New Year – the biggest event on the lunar calendar – yet investors are still basking in the glory of having made some profit. It is definitely wonderful news, on the lack of bad news, that the global stock market has finally shown good signs of continuing its rally so much so that even a 0.1 percent dip in the US economy in the fourth quarter of 2012 did not shock the markets. After all, US Federal Reserve Chairman Ben Bernanke reassured investors that the number was just a blip while reiterating the moderate growth stance that he has been adopting thus far. Most importantly, he did not alter his policy statements meaning the Fed will continue to buy US$85 billion of treasuries each month in the foreseeable future.

While some negative earnings news and an overbought factor contributed to some profit taking on the final days of January, a bout of healthy correction is needed for the bulls to recharge hence there is no need for investors to worry.

Is The Rally Broad-Based?
If we were to take a closer look at the local bourse, it seems that stocks that have been hogging the top volume are none other than the penny stocks – especially those that are below $0.20 that move by $0.001 per tick.

What is the reason for this phenomenon?

The common characteristic of such penny stocks lies with the fact that most are fundamentally unattractive, some of the money-losing and have not been actively traded prior to this period.

Traders enjoy punting on these stocks because money can be made when the price moves by a tick as the brokerage incurred by such traders can be as low as 0.05 percent or even lower compared to the 0.25 percent that retail investors incur trading on internet platforms.

Take K1 Venture for example, this stock rose $0.017 from as low as $0.152 on 31 January. An investor who buys 100,000 shares at a cost of $15,200 stand to profit $1,700 excluding trading-related charges while the bigger traders who buys usually in 500,000, 1,000,000 and 2,000,000 shares can make as much as $500 to $2,000 when the price moves a tick higher.

This trend of trading in the penny stocks has been ongoing for almost two months with different stocks being played up each day. This rotational play keeps investors interested because of the low quantum required as compared to the blue chips and the returns can be astronomical.

But is the penny stock rally a good gauge of broad-market interest?

If we take a look at the blue chips, look no further than the barometer STI because the index represents almost all the heavyweights. The STI rose exponentially from mid-November to the end of December but gains have slowed in January primarily because of the cooling measures that the government introduced to curb property prices. This hurt some property counters and banks but some developers such as CapitaLand has since bounced even higher than before the measures were announced.

On the other hand, property counters such as City Developments failed to match the feat of CapitaLand because the latter if far more diversified in its property segments and geographical footprint.

Those in the commodities field like Noble Group, Golden-Agri Resources and Olam International are laggards in every sense while Wilmar International fared slightly better by matching the performance of the STI. The banks, too, are laggards with DBS rebounding near to its December highs after being hammered in January while UOB is much weaker compared to the former. Investors who like to invest in banks can expect DBS to trade above $15 very soon while those who wish to achieve higher returns can look at UOB to play catch-up. This is on the assumption that neither of these banks deliver a bombshell when they announce their results on 6 February for DBS and 27 February for UOB.

Within the transport sector, SMRT fared the worst for obvious reasons while Singapore Airlines was largely in-line with the rise in the STI. ComfortDelgro is the star performer having risen from $1.57 in mid-November to $1.93 on the last trading day of January. This 22 percent jump beats the sector and even the STI by a mile.

Are We In A Bull Run?
No, no yet. This is not yet a broad-based Bull Run because the STI has yet to rise by 20 percent (the usual stock market definition of a Bull Run) if we were to use November 2012 as a starting point.

However, the charts of the STI have shown that the Bull Run started way back in June/July last year when the index was at 2,700 points, which also means that the STI has chalked up a total of 580 points – more than 20 percent. While we cannot be certain that this will be the mother of all Bull Runs, we are indeed in one because the index have risen 20 percent and technical indicators all point to the fact that we are in one.

The US stock market is now in the fifth year of the current Bull Run although it sounds crazy to think that we are in one after all the different crisis since 2007. But we must remember that Bull Runs always start when the bear market bottoms out and the final stage of the big rally normally coincis with good news, strong growth and stock market euphoria. Are we at that stage? No, not yet because there is still plenty of fear out there and many investors are not convinced that this is the real deal.

While we cannot be sure that this mini Bull Run still has legs to run, investors should take the leap of faith and start buying during small pullbacks to regain some confidence. If an investor is afraid to take the first step, pick one stock – a laggard that is fundamentally sound – and allow it to move up while maintaining a tight cut loss point. Once a right decision has been established, the rest will follow and confidence is regained.

Still, Caveat Emptor!
Despite the slightly bullish outlook painted above, investors should still be mindful that the STI has risen for more than two months without a meaningful broad-based correction. The excessive punting in fundamentally-weaker stocks – penny stocks – makes jumping into the market even more dangerous.

In a Bull Run, almost anything and everything rises so it will be more advisable to pick the STI component laggards.

Article from DMG VP,Gabriel Gan