Wednesday, July 12, 2017

Market Outlook: Is The Rally Over?

Yesterday I updated on the outlook of our market where I have noted that FBMKLCI has broken its intermediate uptrend line while FBM70, FBMSCAP & FBMFLG have broken their horizontal support or have a downside breakout of their price pattern. Thus the market outlook has turned negative for the next few weeks.

However I am cautiously optimistic that market may continue to go higher after this period of consolidation. After all, we should be rallying like the US markets. From the chart below, we can see that FBMKLCI is closely correlated to S&P500. I have pinpointed the peaks (A, B, C) & bottoms (X, Y, Z) for both markets. You may notice that we failed to follow US lead in the past 12 months. Why? You may also notice that we were trending lower in 1998 while US was in an uptrend. In both occasions, our ringgit was exceptional weak.

 Chart 1: S&P500 & FBMKLCI as at June 2017

If you look at the next chart - the USD-MYR pair and FBMKLCI - you will notice that FBMKLCI rallied strongly in 1999 after the MYR has stabilized. Today we can argue that the MYR has also stabilized. Thus there is a high chance that our market may do catching up with the US markets.

 Chart 2: FBMKLCI & USD-MYR as at June 2017

Now I will make an argument that we are poised to enter into the next up-cycle in the market- provided the MYR stabilizes and the US markets do not crash. Based on the 30-year chart of FBMKLCI, we can see that we had experienced 4 cycles; the peaks were in 1981, 1997, 2007 & 2014 while the bottoms in 1986, 1999, 2009 & 2016.

Chart 3: FBMKLCI 30-year chart

When will the developing cycle peak & the subsequent bottom? Based on the chart above and perusing the interactive chart of, I arrived at the month the market peaked & bottomed in the last 4 cycles. After that, I did the following:
1) I counted the gap between the peaks as well as the bottoms (in months)
2) I averaged the gap between peaks & between bottoms in each cycle
3) I noted the narrowing of the gaps from one cycle to the next cycle
4) I assumed the narrowing persists for next cycle at the same rate as the immediate preceding cycle  

 Table: FBMKLCI: Cycles & Gaps

In the last column, you will see the gap to the next peak/bottom shall be 59 months after we take into account the narrowing of the gap of 26 months. With that, the next peak & bottom will be around April 2019 & September 2021.

I would advise you to take in my work with caution because cycle analysis is a tricky thing. In addition, the new cycle may be substantially change if MYR fails to stabilize or US markets crash. Nevertheless I believe that the prospect of the market entering its next up-cycle is not far-fetched. We would do well in the market if we avoid being overly bullish or overly bearish on the market. The best attitude to have is to be cautiously optimistic about the market.

No comments: