Over the past few weeks, our market has been rising steadily & making new high nearly everyday. On everyone's mind is the question: What's happening?! We are making new high as the global economy is weakening, with Chinese economy on the cusp of a hard landing, Eurozone on the edge of sovereign debt crisis and US economy teetering into another recession. Our market indices (FBMKLCI & FBMEMAS) are higher today than three months ago, contrary to the perfomance of indices of the stock markets in US, Singapore & Hong Kong.
Deja Vu, All Over Again
Don't fret! We have seen this situation before. It happened in early 2008 when our market was higher than its recent high in October 2007 as well as threading into the new high territory. At that time, the main indices in US, Singapore & Hong Kong was lower than their respective high in October 2007. See the table below.
Table: Indices in Early 2008 & Today
(Note: Indices for Dow Jones, Strait Times & Hang Seng are rounded up)
The reason for this exceptional performance is probably the final pre-election rally! In 2008, we had a rally into new high, against the run of play in global equity markets because the ruling party planned to call an election a few weeks later. Go the 2012 & 2008 calenders to crosscheck on the dates mentioned. The pertinent dates are:
- FBMKLCI & FBMEMAS made new highs in first week of January 2008
- Parliament was dissolved on February 13, 2008
- Election Commission announced nominations would be held on February 24, 2008
- General polling set for March 8, 2008
Chart 1: FBMEMAS's weekly chart as at July 18, 2012_11.45am (Source: Quickcharts)
Chart 1: FBMKLCI's weekly chart as at July 18, 2012_11.45am (Source: Quickcharts)
FBMKLCI & FBMEMAS are both pressing against the line connecting the 'high' over the past 18 months. From the FBMKLCI weekly chart, we can see the uncanny similarity in the price chart & the indicators between the current period & that's experienced in early 2008.
What to do?
If this is the final pre-election rally, then we must be careful not to hold too much shares when the local funds pull the plugs or take their profit. If the previous election can be a guide, the profit-taking will come before the announcement of the dissolution of Parliament. With Hari Raya Aidilfitri likely to be celebrated on August 19-20, National Day will fall on August 31 & Malaysia Day will fall on September 16, I think the dissolution of Parliament will only happen in late September. If that is the case, then the current rally could last for a few more weeks. On the other hand, if the Government planned to dissolve Parliament right after Hari Raya Aidilfitri, then the rally could end much earlier.
Based on the above analysis, you should reduce your exposure to the market or take profit steadily during the interim period of 1-3 weeks. Good luck!