Market Outlook: Who is afraid of CNY correction?

On January 22, I've written about the potential of the then developing rally, which most have called the CNY rally (here). To wit, I've stated that the CI may rise to 1220 & peak in the second week of February. As at the end of last week, the CI is nearing the target (see Chart 1 below) & one would await anxiously the onset of the anticipated correction. Should we be afraid of this correction?


Chart 1: CI's daily chart as at Feb 2

After further study of the CI for the past 16 years, I've noticed a fair bit of similarity between the current rally & the rally of 1993 (see Chart 2 below). From Chart 3 below, you can see that the current rally began after a breakout of a 3-year rising wedge at the 985 level in October last year (which I've posted on earlier). The earlier 1993 bull run happened after a breakout of a 3 & 1/2-year rising wedge at the 680 level in March/April 1993 (see Chart 4 below).

The 1993 bull run gained 660 points or 97% to reach a high of 1340 points. If the current rally can make a similar 660-point gain, it may hit a high of 1645. On the other hand, if it gained 97%, it may hit a high of 1940. These are very ambitious targets but they are not far fetched if you have been following the economic & corporate development lately. There are a lot of exciting news or announcements include news of huge jump in foreign ownership of top blue chips, spectacular M&A activities (such as Synergy Drive), implementation of mega projects etc. All these have provided the catalyst for a very bullish case for Malaysian equity but unfortunately the retail investors have yet to be convinced. I think they will only buy into the bull case when the CI has broken into new high. Until then, these 'wise' investors would be watching the market action from the ceiling while the 'fools' are dancing on the trading floor.


Chart 2: CI's daily chart from 1998 to Feb 2, 2007



Chart 3: CI's daily chart from 2003 to Feb 2, 2007



Chart 4: CI's daily chart from 1988 to Feb 2, 1994

Conclusion/Recommendation

At this point, it is still prudent to raise some cash since the market has had quite a sharp run-up. The amount of cash reserve to hold is entirely up to your risk appetite. An amount of 20-30% may be reasonable. In the event that the market were to take a tumble, you should add to your position again if the CI were to retrace to 1150 & below.