Talking technicals

March's madness will give way to a bottom in June, and then it's up and away for the STI, David Bensimon tells GENEVIEVE CUA

Published March 21, 2007

HANG on to your seats. Markets could be in for more downside from here, says trader and analyst David Bensimon, whose prescient calls on the market has earned him a following among bankers and professional traders.

Mr Bensimon, who uses a blend of fundamental and technical analysis, believes the Straits Times Index could hit a bottom in June at about 2,600 along with the S&P 500. But there is a silver lining. That turbulence sets the stage for a strong rebound for the rest of the year.

'After dropping quite rapidly in the next three months, the market will recover very strongly in the second half and finish the year in positive territory. The middle of the year will be the best buying opportunity since the end of 2002. But to buy on dips now is premature,' he says.

The STI is currently at about 3,116. A drop to 2,600 would mean a retracement of over 16 per cent from the current level, and about 21 per cent from the high of 3,310 on Feb 23.

'We're now in a three-month consolidation phase, effectively digesting the last four years' advance. The magnitude of the correction is about 15 to 20 per cent depending on which market, and probably closer to 20 per cent.'

'We're now in a three-month consolidation phase, effectively digesting the last four years' advance. The magnitude of the correction is about 15 to 20 per cent depending on which market, and probably closer to 20 per cent.'

- David Bensimon,

trader and analyst

Mr Bensimon spent 18 years as a trader for a number of institutions, trading various assets including interest rates, equities and currencies. During this time, he honed his approach to markets. He currently runs his own consulting firm, Polar Pacific, a research service mainly for institutions featuring forecasts and entry and exit calls depending on service subscribed for. Institutions have approached him to manage money for them, and he is mulling over his options which include setting up segregated fund management accounts, or a unitised fund for sophisticated investors.

Phi-losophy

The core of Mr Bensimon's analysis lies in what he sees as symmetries and proportionalities in markets. His work is underpinned by the functions of 'phi', also called the 'golden mean'. In ancient Greek, 1.618 and its inverse 0.618 signifies the natural growth rate, which he believes permeates financial markets.

Last year, he published a a hefty volume on his outlook over the next 10 years and beyond, covering 30 key markets across four asset classes. The book, Polar Perspectives, has sold some 300 copies so far at US$685 apiece to his clients of bankers, traders and hedge fund managers.

As with all technical analyses, nothing is set in stone, and the outcome hangs on probabilities. Mr Bensimon has called for a consolidation in markets since late last year.

Technical analysis, of course, has its sceptics. Still, it offers opportunities. 'If you can recognise how the decline fits into the big picture, you can be confident to buy when the market dips 20 per cent.' It also staves off panic, unless you have bought on leverage and are forced to sell.

That brings us to the fundamentals. Globally, there is no recession or even an anticipation of that. 'But simply, valuations have run too far ahead of reality. Everyone was optimistic, markets were pricing in an idealised view of the future. People who bought at the high were 'weak longs' who have paid too high relative to the real value. The market corrects, and smart money moves out quickly,' says Mr Bensimon.

So, what should you do if you are sitting on a portfolio of shares? If you had bought at attractive levels and take a long term view, just hold on. 'You don't need to take action as long as you're comfortable with the temporary decline.' Or, you could hedge through selling index futures. Index futures are, of course, an imperfect hedge unless you hold blue chips which are representative of the index.

'If you bought on leverage and at a high level, you'd be vulnerable and sensitive to a 20 per cent slide. In that case, it's pertinent to have portfolio insurance.'

If you hold small cap shares, you could purchase put options as a hedge.

His longer term outlook for Asia is bright. Asia, he says, will outperform the US and Europe over the next five years. In the context of the markets' trajectory of the last five years, the current correction is modest, he says.

Gold watch

Meanwhile, Mr Bensimon believes that gold could gain 10 per cent over the next couple of months, before it begins a sharp decline to US$550 per ounce sometime in November. Gold spot is currently at US$654.80. A 10 per cent rise from the current level would bring the price to about US$720. This implies that the slide would be similar in magnitude to the correction in May and June 2006, except that the latter took place over just one month. Between May and June, gold plunged from a high of US$727 to US$548. The expected 'pronounced downside momentum' would itself contribute to the technical reason to buy gold at US$550, he says.

At that point, the market will be poised for a ''strong acceleration' to a new high. Mr Bensimon expects gold to hit US$2,600 an ounce by 2014. Between 2008 and 2014 are five to six years when gold is expected to more than triple in value from US$800 to US$2,600. 'But it is not ready to resume that sequence until it hits US$550 in November.'

There is a chance, albeit slim, that gold could exceed US$730 shortly. 'But the greater probability is that it will fall back for the next six months. But if the market exceeds US$730, that will be a very significant break of the entire structure of the last 30 years. That has to be respected as an immediate signalling of the continuation of the larger uptrend.'

Mr Bensimon does not engage in short term trading at the moment. He has, however, long term holdings in a number of metals, which he bought at the bottom in 1999, including gold at US$253. He also bought silver at US$5, and this has about tripled; and platinum at US$400 which has more than tripled in value.