Market Outlook as at October 4, 2016

Everyday I hear my fellow remisiers and investors bemoan the sad state of our stock market. Who can blame them since our stock market has been drifting lower for the past 3 years! Today, I'm going to make a case that our market could have made a bottom and we could see the start of the recovery by the end of the year.

Let's begin with the main market barometers: FBMT100, FBM70 and FBMKLCI. We often look at FBMKLCI and no more. FBMKLCI consists of 30 component stocks. Together with the 70 component stocks (that make up FBM70), we have FBMT100. Below we can see that FBMT100 is moving sideways as it balances the rising FBM70 and the declining FBMKLCI.


Chart 1: FBMT100, FBM70 & FBMKLCI's monthly chart as at Oct 4, 2016 (Source: Shareinvestor.com)

The component stocks of FBMKLCI include mainly stocks in trading services and finance sectors. Below we can see the Trad/Serv Index rebounded off its low in 2015 and then moves sideways for the past 13 months while the Finance Index has not rebounded from its low in August 2015 or January 2016.


Chart 2: Trad/Serv & Finance's monthly chart as at Oct 4, 2016 (Source: Shareinvestor.com)

In addition if you look beyond the top 100 stocks, you will find that the Ace Market stocks, Small-cap stocks and the Fledgling stocks are doing reasonably well. FBMACE and FBMFLG are still in a long-term uptrend line while FBMSCAP is moving sideways.


Chart 3: FBMACE, FBMSCAP & FBMFLG's monthly chart as at Oct 4, 2016 (Source: Shareinvestor.com)

When will finance stocks recover? Looking at the Finance Index over the past 20 years, we can see 4 instances of market top (denoted as T1, T2, T3 & T4). These market tops were followed by market bottoms (denoted as B1, B2, B3 and possibly B4). I say, possible B4 because the index is barely above the 10-minth SMA line, even though we can see the MACD crossing above the MACD signal (a bullish signal) plus a hook-down in the ADX (a weakening of the existing downtrend momentum).


Chart 4: Finance's monthly chart as at Oct 4, 2016 (Source: Shareinvestor.com)

The Finance Index will finally curve up when the downtrend in Maybank reversed. Thus, a recovery in Maybank will lead to a recovery in the Finance Index which will in turn lead to a recovery in FBMKLCI and our stock market. Unfortunately, the downtrend in Maybank is very much intact with momentum picking up in the past few months.


Chart 5: Maybank's monthly chart as at Oct 4, 2016 (Source: Shareinvestor.com)

Meanwhile I believe that a slow and steady accumulation of beaten stocks is the safer approach in investing in this market. The preferred sectors are construction, packaging & rubber glove.