WITH the Dow Jones a whisker away from the key support level of 17,992 points last week, investors are wondering how they should tread the market here.

Although the Dow recovered last Friday on a jump in China’s producer price and better than expected earnings from JP Morgan and Citigroup, volatility has returned.

Concerns over weak earnings, election outcome early next month and December rate hike are not going away anytime soon, plus the fact that high valuations of US stocks need to find a justification for continued bullishness.

Global markets rose last Friday an increase in China’s factory output prices in September – for the first time in almost five years. But a day earlier, stocks were hammered by an unexpectedly poor Chinese trade report for the same month.
In view of all that, investors locally would be quite jittery as November approaches.

“This is definitely a tricky period for the US equity market considering all the factors. Downside risk is obviously there,’’ said Thomas Yong, CEO, Fortress Capital.

“I think a period of no or low gains like right now for the Dow is a prelude to flushing out of weak holders whose holding costs are high.

Once they cash out, the selling may begin to snowball,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

“I am cautious but optimistic. Stay invested but choose those companies with strong balance sheets and good dividends,’’ said Danny Wong, CEO, Areca Capital.

‘’Potential catalysts for Malaysia include more infrastructure contracts, oil price staying in the new range of US$50-US$55 and positive sentiment from possible election news flow,’’ said Wong, adding that what people think matters when it comes to expectation of elections.

In a new note, HSBC technical analyst Murray Gunn said he was now on alert for a possible big dip in US equities.

“With the US stock market selling off aggressively on Oct 11, we now issue a red alert,” Gunn was quoted as saying by Bloomberg. “The possibility of a severe fall in the stock market is now very high,” Gunn added.

Gunn noted that volatility had continued to rise since the end of the summer and that the Oct 11 sell-off was seen across many areas of the market, and not just select groups.

Other firms that issued similar warnings included Citigroup head forex strategist Steven Englander who told clients that investors weren’t adequately hedging US election risk.

Technical analysts at UBS were calling for a top in the S&P 500 following the recent bond market sell-off that pushed yields on the benchmark 10-year US Treasury above 1.7%, said Bloomberg.

The key levels that Gunn and his team are watching are 17,992 in the Dow Jones Industrial Average and 2,116 in the S&P 500. “As long as those levels remain intact, the bulls still have a slight hope,” they were quoted as saying.

With the bulk of earnings yet to come, investors in the US market will be looking for profit turnaround to continue the bullish momentum.

Conflicting statements on oil output cap by Russian president Vladimir Putin and Igor Sechin, the head of state-controlled Rosneft, point to a potential setback in the oil price uptrend that was spurred by talk of a production cut by oil majors.

Saudi Arabia, a major voice in the Organisation of Petroleum Exporting Countries (Opec) and Russia, a non-member of Opec, are the world’s top two oil producers and their co-operation would add more credibility to the pact on output cut.

Putin had told an energy congress last Monday that Russia was ready to join a proposed Opec cap.

However, Sechin said Rosneft would not cap production.

Sechin has long argued that any oil price increase as a result of joint actions by Opec and non-Opec members will allow the US to resume production growth from high-cost shale deposits, said Reuters.

As a result of such confusion, some economists are not changing their outlook on oil price.

“There’s no change in our view on oil price for this year at US$42.50 per barrel and US$50 per barrel for next year. While we did mention Russia ‘joining the party’ would add credibility, conflicting statements by Putin and Rosneft on Russia’s participation raises doubts,’’ said Suhaimi Ilias, group chief economist, Maybank Investment Bank.

The feeling out there is more of ‘jawboning’ the crude oil market via statements.

“Real action remains elusive especially with many moving parts on oil market dynamics sending conflicting signals, for example, Iran’s continued ramp up in output; potential rise in US production as in the increase in rig count in recent months and downside risk to demand on persistent worries over the state of the global economy,” said Suhaimi.