FBMKLCI-HB Tells a Tale?

If you compared the movement of FBMKLCI-HB & FBMKLCI over the past 6 months, you would notice a divergence (see Chart 1). When FBMKLCI-HB broke above the horizontal line, a in October, it coincided with FBMKLCI breaking below its horizontal line, A. Similarly, when FBMKLCI-HB broke above the horizontal line, b in December, it coincided with FBMKLCI breaking below its horizontal line, B. However, FBMKLCI-HB has been trading above its recent high since the start of the year, FBMKLCI has yet to surplus its recent low.

There are 2 possible explanations or scenarios:
1. The bearish case is that FBMKLCI may eventually catch up with the FBMKLCI-HB (in the opposite direction)
2. The neutral case is that FBMKLCI-HB has its own demand dynamic as it serves as a portfolio insurance in the event of a bear market. You may notice that FBMKLCI-HG has also surpassed its recent high. In a bearish market, put warrant is the appropriate trading instrument.


Chart 1: FBMKLCI & FBMKLCI-HB's daily chart as at Jan 7, 2015 (Source: Shareinvestor.com)

I have tabulated the valuation for all the put options/warrants for FBMKLCI below. FBMKLCI-HB & FBMKLCI-HG have more volume and as such, they are better suited for analysis. However, since FBMKLCI-HB was listed earlier, it offers a better comparison with FBMKLCI for our study.


Table 1: FBMKLCI-HWs' Valuation Table


Chart 2: FBMKLCI-HB's daily chart as at Jan 7, 2015 (Source: Shareinvestor.com)


Chart 3: FBMKLCI-HG's daily chart as at Jan 7, 2015 (Source: Shareinvestor.com)

I have also appended below the volume distribution of FBMKLCI-HB & FBMKLCI-HG. It shows that the transactions involved are fairly small, possibly due to speculative activities by retailers. If so, the divergence noted may be less significant as retailers tend to trade haphazardly. However, institutional traders are also known to trade in smaller lots to disguise their activities. As such, it is hard to come to a firm conclusion whether the trading for these 2 put options are retailer-driven or institutional-driven.


Diagram: Volume Distribution for FBMKLCI-HB & HG (Powered by Shareinvestor.com)

On the other hand, the trading in the call options of FBMKLCI is less of a guide as the volume for many of these options is very small. Nevertheless, I have appended below the valuation table for these call options/warrants. The chart of one of the slightly more active call warrants (FBMKLCI-CO) is shown below.


Table 2: FBMKLCI-CWs' Valuation Table


Chart 4: FBMKLCI-CO's daily chart as at Jan 7, 2015 (Source: Shareinvestor.com)

Based on the movement of FBMKLCI-HB, there is a good possibility that the index may revisit or even surpassing the recent low of 1671. This is based on the bearish assumption that FBMKLCI should track the movement of FBMKLCI-HB. On the other hand, if you feel that the movement of FBMKLCI-HB was driven by retailer trading activities or portfolio insurance buying, then the divergence may be less significant.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of FBMKLCI or any of the call or put warrants.