I was a bit surprised by the decline in the STI Index yesterday as it was holding up well until about 3.30pm (see intra-day chart below).

I reiterate my view that this is an overdue correction not a trend reversal as the macro economic and more importantly corporate earnings cycle seems to be strengthening.   What we are seeing now is the pain caused by the gradual removal of fiscal stimulus and cheap credit - which was expected but what we didnt know was when and by how much.  The only new factor is Mr O's new banking initiatives (Obama) which could curb significant amount of market liquidity.  But there are insufficient details on what he means and how and when it will be implemented if it can get through both the Senate and Congress.  His State of the Union address at 10am Singapore time today may provide some insights into this.  So I would expect markets to be thin and trade sideways up to and after his address in case he drops another bomb shell.   Some cynics (including myself) think he is just posturing to gain popular support to help Bernanke get a second term as Fed Chairman.  Many Americans seem to be unhappy with the Democrats and Obama/Bernanke for saving the US banks but not saving jobs.  So maybe after Bernanke gets a second term this initiative might die a natural death.

The STI broke through its100-day moving average yesterday (see chart below).   I am not a chartist but it looks like this could signal further weakness to the 2500 level.  So I expect markets to remain volatile until we have more clarity on the new bank rules by Obama and also until after the FY2009 reporting season.  This will give a better picture on whether the sharp rise in stock prices is supportable and sustainable in terms of earnings growth and expected earnings growth. 

One encouraging trend is that the VIX index is falling despite the weakness in Asian markets.  I remain convinced that this correction will provide a buying opportunity - what I dont know is how long it may last......but if we see investors waiting for the FY2009 results to be announced this is expected to last until the end of February 2010 - so another 5-6 weeks.