Sell setup, Sell banks

Last week, we stated the rally in the US stock markets was seen to be countertrend bear rallies and that there were no signs pointing to major lows for the US indices. There is a strong chance of another knee-jerk rally on news that the Paulson bailout plan would be approved by the US Congress. However, do bear in mind that previous rallies on Fed rate cuts and other measures have only led to further declines. This time, the chart formations on the DJIA and the S&P 500 suggest the same. We now lower our resistance target on the DJIA from 10700-10750 to 10600-10650 and expect a decline towards 9500-9600.

In Singapore, we similarly warned that an earlier 270-point advance was highly speculative and risky. We suggested switching into defensive stocks.. Most of these stocks like SIA Engineering, SPH, Parkway Life REIT and FSL Trust have outperformed, even as the STI lost 62% of its gain to reach a low of 2399.
We continue to recommend the same defensive stocks and add CDL Hospitality Trust to the list. There is a strong possibility that the index could rally towards 2520-2535 before heading down towards 2200. We would see any such gains as opportunity to add shorts, in particular to banking stocks. We have been recommending shorts on banking stocks for the past four months, expecting them to at least re-test March lows. We still expect the same. In fact, there is a strong chance that banking stocks could correct at least another 10% from current levels.