After about a 100 days the early March 2009 rally which pushed markets to very over-bought levels finally seems to be pausing for breath.  The long awaited correction or consolidation is good as stocks have run ahead of fundamentals pushing the market from a very under valued to an over-valued scenario.  The 60 point correction in the STI yesterday was broadbased but on low volume with penny cap momentum stocks bearing the brunt of the losses.

The catalyst for the correction has been on the cards for some weeks but it seemed that investors were playing "chicken" because many had missed or entered late into the rally and didnt want to be the first to take profit on the chance that there wouldnt be a meaningful correction.  A switch back to US$ assets, a rise in long bond yields seemed to see liquidity shift back to the US$ causing weakness in both commodities and stocks.

Overnight the Dow and the Nasdaq shed 187 and 42 points respectively to close at 8612 and 1816 amid weakness in commodity prices from a stronger US$.  Like Singapore, the weakness was on lower than average volume.

Singapore market - 2440 looks to be a resistance level

Some weeks ago, I used the highest stock price of 10 STI Index stocks by the most optimistic analysts to arrive at an STI target of 2440 and if I used the average forecasts the fair value was 2340.   Both levels seem to offer some resistance which require an upward revision of earnings estimates before they can be breached. The chart below of the STI Index shows three levels of support for the index.   2107 is the first support with 1900 being the next and stronger support.

As the stock market rally started to get extended on the huge amounts of liquidity that global central banks had pumed into the banking system to unlock their credit markets, my strategy was to identify good companies that would survive a "V" or even "U" shaped recovery on the strength of their business model and balance sheets and which were also trading on undemanding PERs or below 1 time price to book.  These I added to my stock pick list which now comprises ten stocks.   I also suggested that in order not to be sidelined and in the event this correction isnt meaningful that investors should commit some of their money to these stocks with a vew and ability to average down should a meaningful correction take place.   I strong urged investors to avoid high volume momentum plays especially in stocks with little or no fundamentals to support their price rise other than being laggards.

So stick to a few good stocks with a mixture of defensive and cyclicals as a hedge to whether this recovery will be "V" or "U".  Personally I still think its a "U" and a slow "U" although this could shorten if the stock market rally persisted and in the process created wealth for the consumer.

In a seperate Blog today, I review the ten stocks on my stock pick list....I still like them.  In this update (which is purely technical), I look at good entry levels should a meaningful correction occur.