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Small change; Psychological barriers all in the mind

19 Feb 2012 The Straits Times (Invest Section) Anita Gabriel, Senior Correspondent 2012 Singapore Press Holdings Limited Focus on the rules of investing as the stock index is just a number, say analysts 2,700. 2,800. 2,900. 3,000. To most of us, these are merely round numbers, but in stock market parlance, they are tagged with a behavioral nuance - psychological barriers, they are called. They essentially mean a point in which a creeping stock market index faces some resistance. These hurdle points keep equity strategists busy poring over reams of historical data to chart and predict when the index will cross the next two-zero or even better, three-zero digits. The cross over usually sends the investing fraternity into a near tizzy. Is this a buy signal? Have investors missed the boat? Or is this a sell signal? For the jubilant investor who scooped up shares before such heady levels, it may even be time to curb the greed and take profit. Not too long after that, if there's more wind beneath the rally's wings, the equity experts are back at their terminals, predicting when the next magic mark (anyone with a bold forecast of 3,100 out there?) will be breached, and then the next, and the next one after that. Last Thursday, the key index in the local bourse, the Straits Times Index, vaulted over the 3,000 mark, its first since August last year. Indeed, it's a numerical milestone worthy of the excitement it incited. Still, should investors care much about psychological barriers? How much more weight should it have on one's investment decisions compared to when the index stood at say, 2,999? The debate on that is as wide and varied as the wild swings of an index between 2,000 and 3,000 points. Many studies into this phenomenon called psychological barriers in stock markets have in fact concluded that they may be an undocumented and unsubstantiated anomaly. There are also doubts on whether psychological barriers, assuming there's method to their sequence, make stock market returns easier to predict. The conclusion is, well, inconclusive.

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What was easier to predict in recent weeks, in hindsight of course, is the STI's climb to 3,000. Since the start of the year, share prices on the local bourse have sprung back to life with much vigour. Year to date, the STI has gained more than 13 per cent, outperforming some major Asian exchanges. The pace of the pickup in investor sentiments has been surprising. Trading value in the stock market has been promising. The average daily value traded has doubled so far this year from $800 million in December last year. The market has visibly switched to a more risk-friendly climate. The sizzle has also returned to penny stocks, which have regained their seat in the actives list on the local exchange. This is another bullish sign as the perceivably riskier penny stocks and second- and third-liners are generally snubbed by investors in a risk-off climate. There is a notion that psychological barriers are in fact sell signals cloaked in bullish sentiments fuelled by false hopes. Now that the key benchmark has crossed the mark and closed the trading week at 3,000.59 points, the question on everyone's mind is: 'Should I chase the rally?' But how different is this from ascertaining if one should swoop in when the index reached, say 2,999 points? In terms of investors' concern over the uncertainties in the global economic backdrop, nothing much has altered in recent weeks. Turbulence still reigns supreme in the euro zone with a potential debt fallout in troubled Greece. Data from that corner of the world has been expectedly spooky. The euro zone economy shrank by 0.3 per cent in the fourth quarter, and Germany's economy contracted 0.2 per cent, raising the spectre of recession in this quarter. The United States has been churning out a slew of mixed data, with a bias on the upside from job growth to manufacturing figures. 'The question is whether the increasingly positive noise from the US can drown out the party- poopers in Greece,' said Mr Justin Harper, research head of IG Markets. Excess liquidity is a many-splendoured thing for stock markets. The European Central Bank launched its Long Term Repo Operation which has rid the system of the immediate risk of a liquidity crisis. And with Round Two of the operation scheduled for later this month, CIMB Singapore's research head Kenneth Ng reckons a short first half of the year window for 'constructive

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Investors are also hoping that the US Federal Reserve could roll out its third round of quantitative easing which will flood the market with a burst of sweet liquidity. China has been providing a soothing balm for investors' frayed nerves. It stepped up to say over the week that it would dig into its overflowing cup of foreign exchange reserves to aid debt-hit Europe. Economic data closer to home has been a mixed bag while the system continues to remain vulnerable to external shocks. In the final quarter of last year, Singapore's economy contracted less than expected, signaling that it might avoid a recession despite the weak global economy. The corporate earnings season has also fared fairly decently. Many say the STI is trading at forward price-earnings multiples that are still below the mean. These, and not second-guessing the psychology of investors, and hence the stock market index, ought to dictate one's investment decisions. Basic investing rules should continue to rule investing decisions. Stay focused on stocks, not market direction, cautioned CIMB's Mr Ng. Remember, psychological barriers are not breached as a natural progression. There's as much method to them as there is to ringing the slot machine hoping to strike the jackpot. anitag@sph.com.sg Singapore Press Holdings Limited