Asia’s Two-Week Equity Rally May Falter: Technical Analysis

(Bloomberg) -- A two-week rally has driven Asian equities to levels on relative strength indexes and Bollinger bands that have signaled declines in the past.The MSCI Asia Pacific Index’s 14-day relative strength index, which measures how rapidly prices have risen or fallen, climbed to 73 today, above the 70 threshold some investors use as a signal to sell. The gauge also moved above its upper Bollinger band yesterday, a sign that stocks may be overvalued.An acceleration in China’s economic growth and better-than- expected U.S. earnings have helped drive an 11-day, 12 percent climb in the MSCI Asia Pacific. The winning streak, the longest since January 2004, left companies in the gauge valued at an average 24.5 times estimated net income, the most expensive level since March 31.

“You’d think some sort of pullback is due after the sheer strength of the last couple of weeks,” said Matt Riordan, who helps manage about $3.2 billion at Paradice Investment Management in Sydney. “Earnings have come in ahead of expectations and the economic data is quite reasonable.”The MSCI Asia Pacific Index’s RSI last touched 70 on June 12, which preceded a two-day, 3 percent decline. The RSI level for Hong Kong’s Hang Seng Index rose to 72 yesterday as the gauge closed above 20,000 points for the first time since the September collapse of Lehman Brothers Holdings Inc. The same measure for South Korea’s Kospi Index climbed to 74.

Bollinger Bands
The MSCI Asia Pacific added 0.3 percent to 109.38 as of 12:06 p.m. in Tokyo, just below the level of 109.8 set by its upper Bollinger band. The index yesterday rose as high as 109.83. The upper and lower Bollinger bands are plotted two standard deviations above and below a 20-day moving average of an index or security.MSCI’s Asian index has climbed 55 percent from a more than five-year low on March 9 on speculation stimulus policies worldwide will revive the global economy.Intel Corp. and Apple Inc. were among U.S. companies that reported better-than-expected results this month. Government figures due July 31 will show the U.S. economy shrank by 1.5 percent in the second quarter, following a 5.5 percent drop in the first three months of 2009, economists surveyed by Bloomberg News predicted.

“Investor expectations for corporate earnings are running ahead of actual results,” said Masaru Hamasaki, a Tokyo-based senior strategist at Toyota Asset Management Co., which oversees $13 billion. “People are concerned that current share prices are too high.”