The ST index has rallied to a high of 3605 today following the FED's decision to cut Fed Funds target rate by 50 basis point to 4.75%. At 3601, the index would have gained 639 points from recent low of 2962. However the gains are not evenly distributed among index stocks. Banking stocks have noticeably underperformed, while the likes of SGX, Sing Tel , SIA and Cosco have rallied close to previous highs.
Sing Tel has exceeded previous high of $3.70 and had reached a historical high of $4.00 today. DBS on the other hand, has underperformed substantially. If one is to adopt a market neutral strategy, then a potential trade worth considering is a short on Sing Tel and a long on DBS. Both stocks are leading index stocks with Sing Tel accounting for 11.4% and DBS accounting for 8.45 %. The attached price chart shows the extend to which both stocks have diverged. The spread between the 2 stocks has widened from a high of $21.38 to a low of $15.48. The current spread is $15.78. Mean 1 year spread is $18.54 and standard deviation (STD) is $1.278. This means that the present spread between the 2 index heavy weights is in excess of 2 STD. Even, if the deviation narrows down to 1 STD, the potential gain of $1.28 represents a 5% return on capital. As such, we recommend a long DBS and short Sing Tel pair trade at $19.70 and $3.92! respectively.
Best Regards
K Ajith