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Occam's Razor and the stock market
By R SIVANITHY

http://business-times.asia1.com.sg/story/0,4567,86841,00.html

Call it what you will - momentum chasing, the herd instinct or a liquidity-driven rally - but there's no denying that a sense of optimism is pervading the stock market at the moment, at a time when the economic numbers don't necessarily justify the strength of the rises.

Truth be told, even brokers are puzzled by what's going on in the market - most report only a trickle of orders from clients and the phones aren't really ringing, so clearly, the bulk of the retail public hasn't participated in the rally since April.

Perhaps the most telling sign that confusion reigns is that daily reports from local brokers are much more circumspect than before - there are no overtly bullish calls being issued nowadays.

Sure, the Japanese market is strong but it's coming off a 20-year low and is still 75 per cent off its high, so even though traders point to Japan as providing comfort for local punters, it shouldn't have that great an influence.

So what's really fuelling the market's rise? Liquidity is one factor, but if the vast majority of the retail public isn't in the market, then liquidity alone cannot account for the gains.

One approach to answering this question is to use the principle of Occam's Razor, which is a philosophical and scientific rule that simple explanations should be preferred to more complicated ones and the explanation of a new phenomenon should be based on what is already known.

The simplest explanation is that Singapore is taking its cue from Wall Street, where a significant post-Iraq war rally has lifted the indices more than 20 per cent in two months. According to some reports, this was aided by hefty doses of short-covering during the months of April and May since the majority of hedge funds had shorted the market ahead of the attack on Iraq.

As a result, house traders have latched onto the rise in a big way to ride the momentum and because there tends to be very little resistance in a heavily under-owned market, prices have snapped sharply upwards.

There's also a fair amount of short-selling and short-covering going on at the moment - recall, for example, that the Straits Times Index last Monday suddenly dropped 30 points on the last day of the quarter, when it was supposed to be window-dressed upwards.

Its 29.85-point rise to 1,516.09 today could have been partially due to short-covering from that episode, aided by an 80-point rise in the Dow Jones Industrial Average futures contract and a firm opening for Europe in the late afternoon.

The parallels between Wall Street and the local market are striking. One is that players in either market are banking on a jobless recovery for their respective economies. Another is that both sets of benchmarks are at key technical points - the Dow Jones Industrial Average at 9,000 and the Straits Times Index at 1,500.

A third is that interest rates are at their lowest in decades, so there's sufficient liquidity in both systems. The fourth - and this may be of some concern to market strategists - is that among the market leaders are stocks with no earnings, namely those in the technology sector.

As one dealer said, 'it's now no longer a play on a recovery or improving economics but instead, it's all about momentum'.

Does this mean a new tech bubble in the making? Probably. Is this cause for concern? Maybe not. The beauty of it all is that this time round, everyone knows the score - there isn't much talk of turnarounds, infinite Internet earnings or other half-baked earnings tales being peddled to get punters to buy.

Instead, it's all in the open this time - tech stocks have dropped the most over the past three years and now that they're moving, it's time to get in, it's as simple as that.

Not all tech stocks have questionable earnings records though. The likes of Creative Technology and Venture Corp have decent track records and their rises today contributed about two points towards the index's final gain.

The top volume list, however, was occupied by the loss-making Chartered Semiconductor and Datacraft, both of which have posted handsome gains over the past month. Chartered today rose 8 cents to $1.05 and Datacraft by US$0.09 to US$1.16.

If both have benefited from relentless momentum plays, neither compares with Thai telecom counter TAC, which continued its upward march yesterday, adding US$0.11 to US$1.74. The stock has tripled in two months with no major announcements to underpin the rise, other than that the company is considering a fund-raising exercise.

Hectic chasing of TAC and Datacraft ensured that non-Sing dollar turnover amounted to 130 million units, among the highest daily hauls in months. The rest of the market also fared well, trading 1.2 billion units worth $774.3 million.