After the strong rally, it is time for a breather

Market valuation. At the level of around 3150, the market looks more than fair.

Based on our model, any move beyond this level will be in ?overstretched territory? (see table below). The recent gains were in property stocks as sentiment on the sector was buoyed by strong take-up rates and ASPs achieved at recent property launches. The technical indicators also suggest that the STI is overstretched based on historical benchmarks (see section on technicals). The model also suggests a downside target of 2700-2800 in a correction.

At the level of around 3150, the market looks more than fair.

Based on our model, any move beyond this level will be in ?overstretched territory? (see table below). The recent gains were in property stocks as sentiment on the sector was buoyed by strong take-up rates and ASPs achieved at recent property launches. The technical indicators also suggest that the STI is overstretched based on historical benchmarks (see section on technicals). The model also suggests a downside target of 2700-2800 in a correction.

Strategy. The market has already built in expectations of a corporate rate cut of 2ppt in the budget to be announced today. There is room for disappointment:

the corporate tax cut may be less than 2%,or there may be higher wage costs associated with an increase in CPF contributions. Even if the changes in the budget come in within expectations, investors could sell on the news ahead of the long holidays as the goodies have already been worked into stock prices.

The budget aside, any move by the Fed to raise interest rates could fuel further correction. This is because the real interest rates for Singapore and the US are at parity for the first time since 2005, and any upward move in US rates will put a lot more pressure on local rates than before.

The market has already built in expectations of a corporate rate cut of 2ppt in the budget to be announced today. There is room for disappointment:

the corporate tax cut may be less than 2%,or there may be higher wage costs associated with an increase in CPF contributions. Even if the changes in the budget come in within expectations, investors could sell on the news ahead of the long holidays as the goodies have already been worked into stock prices.

The budget aside, any move by the Fed to raise interest rates could fuel further correction. This is because the real interest rates for Singapore and the US are at parity for the first time since 2005, and any upward move in US rates will put a lot more pressure on local rates than before.

REITS could continue to stay weak in the near term as price gains have brought yields for most REITS to less than 5%.

The key ongoing themes for Singapore remain as follows:could continue to stay weak in the near term as price gains have brought yields for most REITS to less than 5%.

The key ongoing themes for Singapore remain as follows:

? Tourism/integrated resorts/Singapore as Best Home,Tourism/integrated resorts/Singapore as Best Home,

? Offshore and Marine Hub, andOffshore and Marine Hub, and

? China stocks as offshoots of the China story.China stocks as offshoots of the China story.

Sectors

We recommend buying on weakness post-correction:

Property. Watch out for the Orchard Turn launch which could set a new benchmark for property counters. We like the luxury product segment: integrated property developers still look interesting: SoilBuild, Chip Eng Seng.Watch out for the Orchard Turn launch which could set a new benchmark for property counters. We like the luxury product segment: integrated property developers still look interesting: SoilBuild, Chip Eng Seng.

We also like luxury property plays: Ho Bee, Wheelock.

We also like luxury property plays: Ho Bee, Wheelock.

Offshore and marine. Orderbooks still look good. The next phase of the boom will be in production platforms. Our top calls: SembCorp Marine, Keppel Corp, AusGroup.Orderbooks still look good. The next phase of the boom will be in production platforms. Our top calls: SembCorp Marine, Keppel Corp, AusGroup.

China stocks. Share prices of China stocks have advanced and outstripped the STI, and we take a bottom-up approach in choosing stocks in this sector. They are all mainly in the consumer/industrial segments.Share prices of China stocks have advanced and outstripped the STI, and we take a bottom-up approach in choosing stocks in this sector. They are all mainly in the consumer/industrial segments.

Consumer: Beauty China, Hsu Fu Chi, Sinotech Fibre, China Sky, China Milk.

Industrials: Mid-South, CHT.

For investors who still want to invest, the best defensive plays in our universe are SingPost, Comfort Delgro, SMRT and St Engineering.

Technicals. There are some early signs of a top formation in the STI as several key index stocks have lost their momentum. Several small-cap stocks and recent listings have also declined significantly. The weekly RSI indicator on the index has also declined from the overbought level, suggesting that this could be the start of a prolonged consolidation. It is not unusual to see 15% declines in a bull market and such a move could bring the index down to 2,800-2,850. There are some early signs of a top formation in the STI as several key index stocks have lost their momentum. Several small-cap stocks and recent listings have also declined significantly. The weekly RSI indicator on the index has also declined from the overbought level, suggesting that this could be the start of a prolonged consolidation. It is not unusual to see 15% declines in a bull market and such a move could bring the index down to 2,800-2,850.

Even so, it is quite clear that we are in a two -tier market for while index stocks have not had a meaningful pullback, several small caps and China-related stocks, including the stocks in our fundamental buy list, have corrected ahead of the market. We think investors should adopt a ?buy on dips? approach, focusing on stocks with the best fundamentals. Volatility should increase in the coming weeks and with that, opportunities to bag good bargains. In the near term, the index could correct towards 3050 and then stage a significant rebound.

Even so, it is quite clear that we are in a two -tier market for while index stocks have not had a meaningful pullback, several small caps and China-related stocks, including the stocks in our fundamental buy list, have corrected ahead of the market. We think investors should adopt a ?buy on dips? approach, focusing on stocks with the best fundamentals. Volatility should increase in the coming weeks and with that, opportunities to bag good bargains. In the near term, the index could correct towards 3050 and then stage a significant rebound.

Consumer: Beauty China, Hsu Fu Chi, Sinotech Fibre, China Sky, China Milk.

Industrials: Mid-South, CHT.

For investors who still want to invest, the best defensive plays in our universe are SingPost, Comfort Delgro, SMRT and St Engineering.

Technicals. There are some early signs of a top formation in the STI as several key index stocks have lost their momentum. Several small-cap stocks and recent listings have also declined significantly. The weekly RSI indicator on the index has also declined from the overbought level, suggesting that this could be the start of a prolonged consolidation. It is not unusual to see 15% declines in a bull market and such a move could bring the index down to 2,800-2,850. There are some early signs of a top formation in the STI as several key index stocks have lost their momentum. Several small-cap stocks and recent listings have also declined significantly. The weekly RSI indicator on the index has also declined from the overbought level, suggesting that this could be the start of a prolonged consolidation. It is not unusual to see 15% declines in a bull market and such a move could bring the index down to 2,800-2,850.

Even so, it is quite clear that we are in a two -tier market for while index stocks have not had a meaningful pullback, several small caps and China-related stocks, including the stocks in our fundamental buy list, have corrected ahead of the market. We think investors should adopt a ?buy on dips? approach, focusing on stocks with the best fundamentals. Volatility should increase in the coming weeks and with that, opportunities to bag good bargains. In the near term, the index could correct towards 3050 and then stage a significant rebound.