Market Outlook as at March 7, 2011

Due to the relatively strong rebound on last Friday, FBM-KLCI & FBM-Emas have both recovered above their long-term uptrend line (S2-S2). S2-S2 is my preferred long-term uptrend line for both FBM-KLCI & FBM-Emas for the period from 2009 until today, while as S1-S1 is my preferred long-term uptrend line for the period from 2006 to 2008. The latter is presented for reference purposes.


Chart 1: FBM-KLCI's weekly chart as at Mar 7, 2011 (Source: Quickcharts)



Chart 2: FBM-Emas's weekly chart as at Mar 7, 2011 (Source: Quickcharts)

I have also drawn the alternative uptrend line as S1-S1a & S2a-S2a for both FBM-KLCI & FBM-Emas for the period from 2006 to 2008 & from 2009 until today, respectively. Why do I present here the alternative uptrend line for both FBM-KLCI & FBM-Emas? Why for that matter do we look at both FBM-KLCI & FBM-Emas? In fact, in the more recent post on the Market Outlook, I have also looked at the FBM-KLCI as plotted on log scale as well as on arithmetic scale. I have also looked at the direction of the different moving average lines as well as a few indicators. All of these are intended to confirm our market call. So, we have to weigh between negative & positive observations to come to our conclusion. The negative observations are as follows:
1) the FBM-KLCI has broken below its long-term uptrend line when the chart was plotted on log scale (not on arithmetic scale) .
2) numerous weaknesses in the indicators are observed.
The positive observations are as follows:
1) the FBM-KLCI is still trading above its long-term uptrend line when the chart is plotted on arithmetic scale.
2) the fast moving average line has yet to cut below the slower moving average line.

Finally, we have to assess how far & long can this market go. I have commented before that this market is approaching the 2 years' mark, which makes it the longest rally in the past 18 years (since I became a remisier). From Chart 3 below, I have drawn an upward channel to the FBM-KLCI from 1998 until today. We can see that we are approaching the upper boundary of that channel where the market tends to reverse (as had happened in 2000 & 2008). So if the market were to charge higher, it may go to 1600 from here (now, at 1513). On the other hand, if it were to drift lower (as per the theory of reversion to mean), it can easily drop to the middle line at 1300. So when we weigh the upside (of 87 points) against the downside (of 213), we can see that the risk out-weigh the reward. In such instances, one should not take outsize position in the market.


Chart 3: FBM-KLCI's monthly chart as at Mar 1, 2011 (Source: Tradesignum)

Based on the above, I feel that we should reduce our exposure to equity to a comfortable level. It is for each investor to judge what's his/her level of comfort. Avoid taking position in fundamentally weak stocks at all cost. If you are holding onto fundamentally sound stocks which are trading at reasonable valuation, you are fairly safe.