Market Outlook for the month of May 2007

Recently, we have been deluged with many bullish reports about the outlook of our market as well as our economy. A lay person would very likely be drawn into the stock market due to such positive reports.

What must be pointed out here is that the technical outlook of the market is really not so bullish. As highlighted by my earlier report entitled "Deja Vu?", the short-term uptrend line has already been violated on April 19 & despite the technical rebound that followed, the KLCI has yet to recover above its short-term uptrend line.

In addition, the daily MACD has done a bearish crossover on April 27. I have included 2 MACD indicators in the chart below. The top MACD is the one that I normally use i.e. the MACD where the moving averages are calculated on weighted basis. The bottom MACD is the one that most people use i.e. a MACD where the moving averages are calculated on exponential basis. For simplicity, let's call the top MACD, MACD 1 & the other MACD 2. I use MACD 1 because it gives an earlier crossover than MACD 2. (On the chart below, the crossover for MACD 1 & MACD 2 are denoted as "a" & "b", respectively). Nevertheless, MACD 1 can lead to whipsaw if you are not careful as it is a highly sensitive indicator.

For example, in mid-February, MACD 1 has already issued a warning. I was waiting for the KLCI to break its short-term uptrend line as well as further confirmation from MACD 2. Unfortunately, when both of these events happened, the KLCI dropped off so fast that most investors would not be able to sell at a decent price. Today, we have the alignment of all three events; MACD 1 & MACD 2 have put in the bearish crossover & the uptrend line has most likely been broken. As such, I believe that we have to be very cautious over the next few weeks. A correction may happen anytime. For some, it may be a good time to "sell in May & go away".


Chart: KLCI's daily chart as at April 27 (courtesy of Quickcharts)