Market Outlook as at August 27, 2013 (UPDATED)

UPDATE

As at 3.35pm, FBNKLCI is down 19 points to 1702. The number of losers outnumbered gainers by 1003 to 43. Volume traded was 1.7 billion units. When the number of losers is substantially 99% of the number of issues in the market, that's a sign that the market selling has gone too far. This could lead to a snap back the next day or the day after that. I would advise investors to hold back on their selling. I am not recommending that you buy into the market now unless you are a very experienced trader with good money management skills. 

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If we looked at the chart below, we can see that the rise of our index is well-traced out in two uptrend lines. The first uptrend line was S-S1 which kicked in right after the US Financial Crisis had ended. The recovery could be due to many factors; one of which would be the flood of liquidity from the US. Then in 2011, the global financial markets were rocked by the upheaval in Europe. Another round of quantitative easing followed and the equity markets again recovered. For Malaysia, that recovery takes the form of an uptrend line, S-S2.

We can see that the market moved up in two waves, which were brought on two rounds of tsunami of liquidity (courtesy of the Fed).  

The most gut-wrenching tale of that apocalyptic day (when tsunami hit Sri Lanka) was that of the Queen of the Sea Line, the train that plies the coast, running from Colombo to Galle. At Telwatta, waves charged 200m inland, catching the train laden with nearly 2,000 passengers and thrashed it about like a rag doll before dragging it out to sea.  

When the waves of liquidity have subsided or financial distress returned, the value of stocks would pullback. This is akin to the rollback on the beach after the incoming wave has run its course.

The torrent of water, said to have reached 30m in height, was so powerful it ripped the tar off the roads, rails off the tracks and sucked 90 city buses out into the ocean. 

Over the weekend, I read a supposedly nice travel tale entitled Isle of Delight Beckons, about the beautiful island of Sri Lanka. The part of the story that really shook me was the story of the impact of the Tsunami in 2004 (extracts are included in italics). Suddenly, I was transported back from a leisurely Sunday to the present depressing financial markets. I saw the money printing machines- thousand miles away- pumping waves of liquidity that boosted the value of our investment assets, from equity to realty, to great heights. Now, there are signs that the men-in-charge of this money printing machines may decide to slow down their activities. Who knows whether they may one day bring out the money vacuuming machines. Like the poor people of Sri Lanka, the whole world is now at the mercy of these money men.

Looking back at the chart, it is important that we stay above the 1700 mark, which is both the horizontal line as well as the uptrend line, S-S2. This line on the sand would determine whether we would stay dry or end up in deep trouble for the next few months. A break of the 1700 mark could easily send the market to the 1600 mark or 1500 mark. The latter would represent a 12%-correction from the breakdown of the crucial 1700 mark. This would match a similar 12%-drop in 2011 when the market breached the horizontal line, B.


Chart: FBMKLCI's weekly chart as at August 27, 2013_10.00am (Source: quickcharts)

In the current uncertainty, it is prudent to take precaution not to be sucked into the developing maelstrom. Capital protection will be the order of the day.