The WSJ noted two odd phenomena in this market: small investors have largely bailed out, and (perhaps as a consequence) individual stocks in the S&P 500 have been tracking the index itself to a degree not seen since the 1987 crash (see Chart 1 below).
The average correlation is 44% (since 1980), but is now 81%, higher than in the crash of 2008 (79%) and approaching the all-time high in 1987 (83%). The conclusion from the correlation: fear drives investors to treat the market as a homogenous entity. Adding in the exodus of retail traders, this time the implication is the market has been left for the index 'bots.
Chart: US Stocks' correlation to the S&P500 index (Source: WSJ)
The article is quite technical, with a fair bit of reference to Elliot Waves counts. If you have the patience, I would suggest that you read the article carefully. The writer opined that "...the high correlation is an extreme example of herding behavior..." and in the worst case scenario, "...the floor can drop out of this market rapidly...". Now, that's discomforting.
Dear Alex,
ReplyDeleteHow do you find of IJM Plantation, has it a good fundamental and track records/ dividend paid out like IOI?
I find it attractive as it is not that pricey and recently price's fluctuation not that drastic.
Kind to share if you have any other plantation stocks in mind for long term buy (3-5 years or more). Thanks.
Regards,
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ReplyDeleteHi Alex,
ReplyDeleteIn view of the limited upside in the near term and also the bearish charts in your earlier post, how much cash/stocks ratio do you recommend? 50:50 ?
Also how should we buying back into the counters? Looking at charts again or do dollar cost averaging?
Thank you.
Hi Alex,
ReplyDeleteKYM announced issuance of new ordinary shares at an issue price of RM1.36.
How does this benefit the investor as the current price is 1.30 (as of July 15) ?
Hi Layman,
ReplyDeleteIJMPlant (closed at RM2.45 yesterday) reported a lower net profit for FY2010. This was attributable to lower selling prices. EPS dropped to 11.0 sen from 18.3 sen for FY2009. as such, its trailing PE is about 22 times.
Its dividend payout is low at 5 sen for FY2010 & 8 sen for FY2009. As such, its dividend yield is only a meager 2%. One should not hold this against the company as it is still in a growth stage, where the need for funds for investing activities is quite substantial.
Chartwise, it has good support at RM2.40. In fact, it has been consolidating in the past 12 months in a descending triangle. An upside breakout above RM2.50 could signal the continuation of its prior uptrend. What would be the catalyst for such a breakout? Higher CPO prices, maybe...
Dear Alex,
ReplyDeleteHow do you think of glove stocks?
Any reason for rally of Topglove recently?
Regards
Hi David Ng,
ReplyDeleteBased on the view that the market is rather toppish, a move to a 30-50% cash holding position is prudent & advisable.
Assuming this scenario panned out, then we can expect a fairly significant bear market where the index may retrace as little as 30% or as much as 60%. The bear market of 2000 (after the rally of 1999) resulted in a retracement of more than 60% over a 15-month period. To be sure, one can slowly buy back into the market after a 30% drop.
Hi Kevin Soon
ReplyDeleteKYM announced issuance of new ordinary shares at an issue price of RM1.36 in exchange for a property to be acquired. You've noted that the current price is about RM1.30.
I am neutral as to the impact of this share issue on KYM's shareholders. The issuance price was determined at the time the proposal was announced. In any event, the issue price is fairly close to the current price (in fact, it's higher than current price) should be acceptable to existing shareholders. The seller of the property may not be too happy as the share is now trading at a lower price while the property that was sold could have gone up further in value. Unfortunately, he could do nothing about it as the deal was already struck.
http://announcements.bursamalaysia.com/EDMS%5Cedmsweb.nsf/LsvAllByID/2F5D5B0B6B647CCB48257761003660B3?OpenDocument
Hi @h Tong
ReplyDeleteIf you look at the latest results of the top 6 rubber glove makers, you would see a break in the sequential growth in the bottom-line (not the top-line) for 2 companies- Topglove and Adventa. The reason is both companies have announced their results for the quarter ended May and April. The results for the other 4 companies- Latexx, Supermax, Harta & Kossan- are for quarter ended March and these results were positive, with sequential growth in both bottom-line and top-line. Look out for the next quarterly results for all 4 companies which should be announced by the end of this month. I believe the result should be in line with Topglove and Adventa, i.e. a break in the sequential growth in the bottom-line. This could result in a knee-jerk reaction and profit-taking for the glove makers.
The sharp rise in the price of Topglove & Kossan could be attributable to retail investors chasing for their bonus issue.
The S&P comprises 500 stocks,the index is derived from the weightage of these individual stocks. Since it is an index derived from the movements of the component stocks it is meant to closely track the basket of shares hence the high correlation is by design and any misalignment presents an arbitrage opportunity ie. index arbitrage. A high correlation indicates an efficient market, the program trading sweeps clean any pennies to be picked.
ReplyDeleteI think the article is highlighting the 1987 crash where blame is put on index arbitrage where traders switch in and out of the futures index and the cash market in high frequency mode driving the markets lower rapidly. Now we have circuit breakers.
Hi Geoff,
ReplyDeleteYou made 2 points which I like to comment on. Your points are:
1) A high correlation indicates an efficient market.
2) The 1987 crash where blame is put on index arbitrage where traders switch in and out of the futures index and the cash market in high frequency mode driving the markets lower rapidly. Now we have circuit breakers.
There is no disagreement on my part with regards to the first point when one needs only to see how computers can generate orders in fractions of a second, across the entire market. Does faster execution make for a "better" market? I don't think so. I feel that a market that is driven by a small group of men, trained in a very similar way of thinking, directing highly efficient computers which buy or sell the markets in large quantity orders, leaves ample room for sudden sharp move. The herding by a small group of robots & their masters is more dangerous than the herding by a larger group of diverse individuals because it can push the market to great extremity. One only has to look at the sub-prime debacle to see how a bad idea can be developed into such a fine mess.
Your second point is correct factually but then again every market crash can be explained by a unique one-off reason. The recent one was initially attributable to a fat finger until there can't find the fat finger. The point which the article made -which I share- is simply that a highly correlated market can lead to a sustained one-way move until it failed. Until the floor dropped out. Will the same scenario happen now? No, not yet. But, it will happen one day. With so much money splurging around, all kind of assets, including equity, are being bidden way past their fair value. Funds managers cannot just sit on their hands and say "I will not be a part of this madness". You have to. There is no choice. You earn a fee for managing a portfolio. Taking risk- huge risk sometime- is part of the package.
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