Market Outlook as at February 21, 2008

It has been nearly one month since my last Market Outlook posting (go here). The long-awaited election announcement on February 13th had effectively put an end to the timid recovery. The selling that followed has brought the KLCI to a low of 1401.95 as at 12.00 noon, today. The market may test the psychological 1400 level very soon.


Chart 1: KLCI's daily chart as at February 20, 2008 (courtesy of Quickcharts)

In my last Market Outlook, I had mentioned that the technical picture might have turned bearish for many major markets & this rebound could be a correction (i.e. an oversold rally) within a bear market. I like to expand on this bearish outlook for the local market here.

One of the indicator that I rely on to determine the market's long-term outlook is the monthly MACD. I normally calibrate my MACD using weighted moving average, whereas others may use the exponential moving average. How reliable is this indicator?

From Chart 2a below, we can see that every time the MACD has hooked up, the KLCI would trend upward. That happened in 4 out of 4 occasions.


Chart 2a: KLCI's monthly chart as at February 20, 2008 (courtesy of Quickcharts)

From Chart 2b below, we can see that there are 5 occasions where the MACD had hooked down, including the present one. In the first 2 occasions (marked as A & B), the KLCI went into a sharp downtrend. In the other 2 occasions, the KLCI did not trend downward. In 2003, the KLCI moved sideway (marked as C). In 2005 & 2006, the KLCI also moved sideway but with a upward bias (marked as D). The latter 2 occasions may be explained by the overall bullish sentiment in global equity, which provided some buoyancy to our market.


Chart 2b: KLCI's monthly chart as at February 20, 2008 (courtesy of Quickcharts)

Would the KLCI trend downward or move sideway? That's the question. Since it is more likely to trend downward than move sideway, I believe that we should be very cautious & we should underweight our exposure to the equity market until a clearer picture emerges.