Market Outlook as at September 30, 2011

Our market has shown some strength in the past two days when it withstood early morning sell-off. During that tense period, FBMKLCI was range-bound between 1358 & 1375. Yesterday, it broke above the 1375 level and closed at 1388. This means that the market closed the gap which appeared on September 23. Our market continued to rally this morning & successfully challenge the psychological 1400 level. As you can see, it went to an intra-day high of 1403- a mere 2 points shy off the horizontal resistance at 1405. At the time of writing this post, the index has pulled back below the 1400 level. I believe the market could correct further, possibly to close the gap which appeared this morning at the 1388 level. If the index can stay above this level, we may see another rally to test the psychological 1400 level.

There are however some reports which argue that the current rally in many stock markets is driven by short-covering activities. One reputable website, Bespokeinvest thinks otherwise. It feels that there is a randomness to what's rallying & there is no evidence that highly-shorted stocks are seeing the biggest gains (here). If this is true, the current rally could fizzle out next week. Only time will tell whether you should sell into the rally or hold out for higher prices.


Chart: FBMKLCI's 15-min chart as at September 30, 2011_10.30am (Source: Quickcharts)

The main methods of analyzing stocks

September 27, 2011

Investors & punters through the years look for ways & means to improve their performance in the stock market. The main methods employed are fundamental analysis and technical analysis. Fundamental analysis attempts to value a stock & if the value derived from this analysis is higher than the market price; the stock would be rated as a BUY. Technical analysis attempts to gauge the price direction for a stock and if the reading is bullish, the stock is similarly rated as a BUY. You can read more about this by visiting Investopedia (here) or googling for these phrases.

The purpose of this article is to explain the difference between these two important methods and how you can benefit from applying them in your investment. The main strength of fundamental analysis is that it can put a price on a stock. The techniques used are mathematical, logical & systematic. And, as such, it is very reassuring. In a hand of an experienced analyst, it is a powerful tool.

Fundamental analysis is not without its flaws. Its most serious shortcoming is that it ignores price signals. Sometimes the price of a stock would move in the opposite direction of what was predicted and the fundamental analysts would brush this important input aside.

On the other hand, technical analysis is a grossly misunderstood & much maligned method of stock analysis. I remember reading about technical analysis in my Financial Management subject for the Chartered Institute of Management Accountants (CIMA) examination. Technical analysis was allotted a total of 3 pages in a book of 600 pages. Without much explanation, the reader would be thrown into the deep-end when we were introduced to the Head-&-Shoulder reversal pattern. Without sufficient background knowledge, a lay person would not be able to comprehend this very reliable reversal pattern. In fact, I suspected the writer is trying to discredit the concept of technical analysis. However, a lot has changed & with the advent of behavioral finance, technical analysis should be given its rightful place next to fundamental analysis in any study of investment.

The strength of technical analysis is that it deals mainly with prices, which is determined by supply & demand. Technical analysts are aided in their analysis by rules that have been laid down & indicators developed over the years. The main premise is that human behavior repeats itself and historical price patterns can be used to ascertain future price movement. Since technical analysts do not study the company’s business & financial data, this can lead to prices of stocks going to the extreme as buyers bid aggressively for rising stocks or dump plunging stocks mercilessly. That’s the main shortcoming of technical analysis.

If you look at some of movers & shakers in the world of investment- people like George Soros or Jimmy Rogers- they analyzed the markets from a strategic point of view. They use their formidable knowledge in economic matters in order to get a big-picture view of the markets. Once this big-picture has been conceptualized, they would make their huge bets. George Soros is known as "the Man Who Broke the Bank of England" after he made USD1 billion during the 1992 Black Wednesday UK currency crises. Jimmy Roger bet heavily on commodities in 1990s & was rewarded handsomely. These visionaries studied the economy using fundamental analysis & quantitative method. They probably did not rely on technical analysis as they were running ahead of the market. As they made the market, they became the market.

However, not every bet placed by George Soros & Jimmy Rogers came out smelling like a rose. George Soros lost big in 1999-2000 when he bet against the Technology sector during the crazy bull-run on Nasdaq. Jimmy Rogers is now heavily invested in China & everyone knows that if you are invested in China these days, you are sitting on huge paper losses. Could they have benefited from using technical analysis? I believe they would have. If technical analysis was not important at the conceptualization stage, it would gain greater prominence as the investment progresses. With technical analysis, you can gauge the strength of the market & how far a security or commodity could rise.

Not many of us have the privilege of being served by a team of research staff, like George Soros or having many investment advisors on call, like Jimmy Rogers. We have to do the ground work on our own. I would recommend that you familiarize yourself with both fundamental & technical analysis. Use them together & the return on your investment would improve handsomely.

(This is my latest article in Merdeka Review. For the Chinese version, go here)

Market Outlook as at September 28, 2011

Global equity markets have dropped quite significantly over the past 2 months. The decline was driven by many factors but to my mind, the most important factor is the festering sovereign debts problem in Europe. This problem is so intractable & complicated that the whole world is worried that it could trigger the second Global Financial Crisis. The first one was triggered by sub-prime crisis in the U.S.

With central banks everywhere running low on ammunition, another Global Financial Crisis could tip the world into Depression II. However, there are signs that the European Union is now putting the finishing touches to a massive rescue plan, which would allow for an orderly default by Greece and possibly another two peripheral countries (Portugal & Ireland); set in place a fire break to prevent contagion effect to other Club Med countries (Italy & Spain); & recapitalization of Euro banks which are expected to take massive haircut on theirs exposure to these peripheral countries.

At this moment, the details on these proposals are very scarce. No official details have been announced. As the plan was supposedly presented by U.S. Treasury Secretary Geithner recently, it is expected to borrow heavily from the U.S. initial rescue package in 2008 [known as TARF]. But the big question remained: Who is going to foot the bill? Everybody assumes that Germany has to be the fall guy. Why? And, would the Germans agree? It would be political suicide for Merkel to cause Germany to take on the entire burden alone.

Meanwhile we saw a huge rebound in risk assets (as equities & commodities) and a sharp correction in safe assets (such as gold & USD). Is this reversal justifiable in the absence of any detail of the rescue package as well as the formidable obstacles which need to be overcome? To my mind, there are too many questions left unanswered at this moment to warrant a sharp recovery.

As for our market, I believe that the current rebound could develop into a bear rally, with the potential to test the 80-week SMA line which was broken in mid-September. I regret to say that this is just an unscientific guess based on my study of the bear rally for 2008. As noted in the previous post, FBMKLCI struggled to hold above the 40-week SMA line in January to February 2008. In early March 2008, it broke below this important support & panic selling ensued. The index dropped slightly below the 80-week (note: 2 X 40-week) SMA line & then snapped back to the the 40-week SMA line.

This round, we saw panic selling once the index broke the 1400 psychological level as well as the 80-week SMA line (in the late September). The expected panic selling set in and the index dropped below the 160-week (note: 2 X 80-week) SMA line. I've expected a rebound after the breakdown of the 160-week SMA line. If we can see a similar bear rally like 2008, the index could potentially test the 80-week SMA line which lent support to the market earlier. Where would the 80-week SMA line be over the next few weeks? It would probably be in the vicinity of 1410-1430.

If you choose to trade or invest in this market, you have to accept the risk that the reported rescue package will pan out to the market satisfaction. In my opinion, we are in a very risky situation as the market has rebounded too sharply in anticipation of this good news. A skittish market does not take disappointment well.


Chart: FBMKLCI's weekly chart as at September 27, 2011 (Source: Quickcharts)

Market Outlook as at September 26, 2011

In January to February 2008, FBMKLCI struggled to hold above the 40-week SMA line. In early March 2008, it broke below this important support & panic selling ensued. The index dropped slightly below the 80-week SMA line & then snapped back.

This round, our index struggled to hold above the 80-week SMA line from mid-August to mid-September. It broke below the 80-week SMA line in the late September. I have expected panic selling to set in once the 1400 psychological level is breached. I've also expected the index to drop below the 160-week SMA line (which it did earlier today). I am now expecting a rebound, possibly after a successful test of the psychological 1300 level. For those who are still holding on to their stocks & looking to sell, my advice is that you may get better prices at the later part of the week.



Chart: FBMKLCI's weekly chart as at September 26, 2011_3.00pm (Source: Quickcharts)

Should I sit out this market?

September 21, 2011

Since the FBMSCAP & FBMFLG gave the early warning of a possible topping-out in week-ending July 8, 2011, I have asked my clients to take profit on their investment. When the FBMKLCI & FBMEMAS gave the sell signal in week-ending August 19, 2011, I have asked my clients to further reduce their position in the market. See my earlier column dated September 7, 2011.

After the end of August, the monthly chart confirmed that that the market had indeed peaked and a new bear market has arrived. I held onto the possibility that the market might have a bear rally after dropping more than 100 points from the peak in a matter of a few weeks. Alas, that hope looks like a dim prospect with each passing day. The market has broken below the triangle ABC at 1445 on September 14. It has also surpassed the recent low of 1423. Having tested a horizontal line at 1405 on September 20, the index is now rebounding. See the daily chart below.

Chart 1: FBMKLCI's daily chart as at September 20, 2011 (Source: Quickcharts)

On the weekly chart, the recent breakdown of the 80-week MA line is very similar to the breakdown of the 40-week MA line in March 2008. If buying support does not come quickly, our index would soon re-test the horizontal support at 1405 & then the psychological 1400 level. If these two supports were to be violated, the market could see a bout of panic selling as experienced in 2007 as well as in the first two weeks of March 2008 (indicated by the arrows). Below 1400 level, the index may enjoy support at the horizontal line at 1350 & possibly 1300. See the weekly chart below.

Chart 2: FBMKLCI's weekly chart as at September 20, 2011 (Source: Quickcharts)

The situation in Europe is looking more precariously with each passing day. A few days ago, S&P downgraded Italy debt to A/A-1 with a negative outlook. The market is factoring in a Greek default, happening in a matter of weeks. European leaders are busy drawing up plans to prevent contagion, preserving the Euro & stabilizing the banking system. U.S. Federal Reserves are also busy putting the finishing touches to a new Quantitative Easing plan. With the fiscal constraints placed by a Republican-controlled House of Representative, the Obama administration would not be able to increase public spending sufficiently to make up for the expected drop in private consumption & investment. In this scenario, the economic resources would be under-utilized. This could only mean that the unemployment situation in America will remain weak, if not worsen.

I have been asked whether it is safe to venture into the market after the decline in the past few weeks. If you looked at the monthly chart in last week column, you would see that a sell signal- once flagged- will be valid for a few months. To me, a bear market can be divided into 3 phases:

1) the initial decline, where the bears & the bulls would still argue about the direction of the market. This would give way to the next stage after the last bulls have thrown in their towel. This normally happened after a failed rebound, which would be called a bear rally later.

2) the selling-down stage, where the decline will fast & furious as the rampaging bears would hunt down the remaining bulls.

3) the bottoming phase, where the bears would be walking around with their heads down and bulls would hardly look like bulls.

The opposite of the bear market- the bull market- will see the mirror image of the above, which will be the initial recovery; the buying-up stage; and finally the topping phase. We are probably coming towards the end of the initial decline (for I am still holding out for a bear rally). If you look at the weekly chart, I have classified the different phases that our market has gone through over the past 5-6 years.

When is a good time to buy? Many think that bottoming phase is the safest time to buy. If you are buying a lot of shares, you have to buy during the bottoming phase. This applies to fund managers who buy in the millions. For retailers, the most effective time to buy may not be the bottoming phase. This is because one can never know when the market is in a bottoming phase. If a new low is made, the earlier-thought-to-be bottoming phase would turn into a continuing pattern as investors await another bottoming phase. To be sure, the most cost-effective time to buy is the initial recovery phase. Yes, you would be buying at slightly higher prices but you would have greater confidence in your game plan & less psychological hang-over. We must however bear in mind that individual stocks would bottom out & recover at different stages. And, we are very far from the recovery stage at this point of time. Meanwhile, keep your powder dry.

(This is my latest article in Merdeka Review. For the Chinese version, go here)

Good blogs don't die. Not-so-good blogs refuse to die.

It always amazes me what you can discover in the internet. I have come across many interesting websites & blogs which are very educational & entertaining. So, when your favorite websites or blogs died off, you feel terrible. It is almost like losing a friend. It also makes you think about your blog and what would happen to it further down the road.

Two weeks ago, I discovered that Politemarket (aka A Peggy Method of Stock Market Valuation) is taking a break from blogging. The blog has stopped posting new entry since August 10. Politemarket is one of the very few Malaysian investment blogs that I find to be very informative and very useful. Just look at the series called "52 ways of Making Money in the Stock Market" (here) or the IPO series (here). I sincerely hope that Politemarket will make a comeback soon.

However, there are some blogs which are not only not informative, their very existence only serves the narrow interest of the publisher. One such blog is Samgang, which has been a thorn at side of many Malaysian investment blogs. His public blog is a kite that advertises his subscription-based blog. As such, his public blog has hardly any useful information. It however contains a lot of mumbo jumbo and a whole load of rubbish. He would make vitriolic criticisms about this fella & that fella & shamelessly trumpeting his successful calls. Oh, don't expect honest answers or deep soul-searching missives from Sam. The man has never made a wrong call before! Why not? He can walk on water!

No underhanded method is beyond him. Of late, he has been aligning himself (& his so-called investment techniques using fundamental analysis) with the success of millionaires & billionaires (here & here). When you can't stand on your own two feet, you have to lean on others. If you must lean on someone, they might as well be millionaires & billionaires. Maybe some of their shine would rub off on him.

I have nothing against fundamental analysis. In fact, some of my best calls are based on fundamental analysis. I do have an issue with Samgang's loud, rude & crude articles. And, the other thing that I find preposterous is that the guy seems to think that he owns fundamental analysis. Finally, I am proud to say that I am one of his favorite targets (here). In fact, I would consider nexttrade an abject failure if it hasn't made it onto that not-so-short honorable list. I won't waste too much good advice on an old dog, like Sam. Maybe, just one:

"Wisdom comes with age, but sometimes age comes alone".

Genting broke its long-term uptrend line in August

Genting touched a low of RM9.02 this morning. However, it must be noted that Genting has broken below its recent strong horizontal support of RM9.40 just two days ago. In fact, Genting broke its long-term uptrend line at RM9.70 in late August. All in all, the chart for Genting is bearish.


Chart 1: Genting's daily chart as at September 22, 2011_9.30am (Source: Quickcharts)


Chart 2: Genting's weekly chart as at September 19, 2011 (Source: Tradesignum)

Note: I am posting on this bearish signal on Genting because a few readers wrote to me about it. A few clients are also very keen on buying and I advised them to hold back or go slow on the buying. I will not post on every bearish chart because I feel it is poor sportsmanship to beat up a dying horse. In the early days when the market was breaking down, I need to post on some bearish breakdown to get the message across. Now, I don't see the need to continue doing so.

U.S. government paralysed by political in-fighting

When I read that some Republican senators wrote to Bernanke to ask him to not to consider additional monetary stimulus proposals (here), it confirms the contention made by Democrats & some independent observers that the Republicans are out to tank the U.S. economy in order to derail Obama's re-election bid (here).

First, the Republicans forced the issue of U.S. fiscal deficit & the debts ceiling. This led to an eleventh-hour compromise which failed to impress investors. When Obama announced a job plan to bring down unemployment rate, the Republicans were not in support of the plan (here). They said that it would lead to higher fiscal deficit. When Obama announced a USD3.6 trillion deficit reduction plan, which includes the Buffet tax hike for millionaires, the Republicans again opposed the plan (here). Now, they have the cheek to tell Bernanke not to do his job in the face of a stalling economy. This kind of nasty no-holds barred politicking will lead to paralysis in the U.S. government. It is exactly the rationale given by S&P for downgrading U.S. national debts.

Nassim Taleb on being called an Idiot

Sometime back, one of my friends told me that my blog does not have enough 'actionable' posts. What he'd meant was that I should have more posts which the readers can use for trading purposes. Today, I read a post in Infectious Greed which dealt with a speech given by Nassim Taleb at University of Pennsylvania (here). Nassim, as most of you may know, is the guy who came out with the Black Swan theory which explained:

1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology

2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

Nassim Taleb at U Penn:

People kept telling me I was an idiot for years [because] I didn’t invest in markets.

I don’t invest in the stock market because I think it’s a sucker’s game. I make my money and I put it in a repository [of value]. Or sometimes I just do these bets for entertainment, nothing else, so I can have a conversation with someone once in a while on a train or on a plane. That’s the only reason. So I stayed in cash, for years, and then realized that the value of my cash became monstrously high after the crisis. The last 12 years, the stock market did nothing, and cash yielded 40, 50, 60 percent.

Cash gives you an option when other people go bust. That’s what Kennedy did. Joe Kennedy, the father, got rich not from investments but from negative investments. In other words, he had no investment when other people were busted. [Take] the story of the two brothers [one of whom makes $4 per share a year while carrying no insurance against being wiped out, one of whom makes $2 per share with maximal insurance]. If the $2 brother can survive—without being kicked out by the board and replaced with some short-volatility fellow who doesn’t understand anti-fragility—then when the other brother goes bust, he’ll be able more aggressively to buy his inventory—his refrigerator, his car, everything, even his house—for nothing. You see the idea? So you have to think in terms of dynamics of cash: that it’s not a sissy trade.

There’s something called action bias. People think that doing something is necessary. Like in medicine and a lot of places. Like every time I have an MBA—except those from Wharton, because they know what’s going on!—they tell me, “Give me something actionable.” And when I was telling them, “Don’t sell out-of-the-money options,” when I give them negative advice, they don’t think it’s actionable. So they say, “Tell me what to do.” All these guys are bust. They don’t understand: you live long by not dying, you win in chess by not losing—by letting the other person lose. So negative investment is not a sissy strategy. It is an active one.

I do not agree with Nassim's speech in its entirety but I agree with some of what he said. For example, some investors would ask what to do with the money if they sell after the market has topped. The interest rate for FD is so low. I have no answer to such silly comments. In an uncertain time, we must worry less about return on your capital but more about return of your capital. If your money is invested in a declining asset, you would not get back your money in full. The phase that I like the most from Taleb's speech: you live long by not dying, you win in chess by not losing—by letting the other person lose.

Market Outlook as at September 19, 2011

FBMKLCI broke below the temporary horizontal support at 1442 as well as its recent low of 1423 today. With this double breakdown, the FBMKLCI is now continuing on its prior downtrend.


Chart: FBMKLCI's daily chart as at Sept 19, 2011_2.35pm (Source: Quickcharts)

A reader wrote to me about my column in Merdeka Review last week. The article is in Chinese and he can't read Chinese and neither can I. I wrote it in English & they translated it for me. The point therein is not new, if you have been following this blog. For his benefit (& possibly yours), I have posted the English version below.

Market made a cyclical top

Last week, we talked about an early warning system of a potential market top. A few weeks after the early warning flashed, the index dropped more than 100 points to a close of 1469 last Friday. Now, we have to address the question of whether we have made a cyclical top or a temporary top. Let’s examine Chart 1 below.

We can see the index has broken below the 10-month Simple Moving Average (‘10-month SMA’) line and the 7-month Weighted Moving Average line has cut below the 10-month SMA line. Trend followers like to overlaid a security or an index with 1, 2 or 3 moving average lines which can function as support lines (in place of straight trend lines which are drawn by the chart user) as will as using the crossing of these lines as a trigger for a BUY or SELL on the security or the index. The last time we witnessed our index going below the 10-month SMA line as well as the crossing of the 10-month SMA line by the 7-month WMA line was in March 2008, when our market made a cyclical top.

In addition, you would note 2 negative readings among the indicators:

1) The MACD indicator plots the MACD line, which is derived from the difference between the 12 & 26-period Exponential Moving Averages (‘EMA’), and the 9-day EMA line, has shown a negative crossover; and

2) The RSI has dropped below its 30-month EMA line.

The last time these 2 indicators flashed the same signal was again in March 2008 when our market last achieved a top.

The only indicator which has not flagged a warning is the ADX indicator. ADX, which indicates the strength of the current market trend, will flash once the trend is clear. For a monthly chart, that would come later. The thing to look out for is the –DMI crossing above the +DMI and the ADX (the dotted line) curving upwards. When these are sighted, the downtrend would be unmistakable. Alas, the prices would be substantial lower than today.

Chart: FBMKLCI’s monthly chart as at Sept 12, 2011 (Source: Quickcharts)

From the above, I believe the market has made a cyclical top & is likely to drop further or at the very least, drift in listless trading in the weeks ahead. Having said that, the market is currently at the stage where some investors are nibbling stocks which had dropped to the desired prices. This is not unusual as investors tend to buy into any correction or consolidation, guided by the belief that the market will recover & go higher (after correction or consolidation). These investors would point to the sharp sell-down in the past, such as in March 2007 & August 2007 as examples of buying opportunity after a sell-off. However, I believe we are more likely to be at a similar stage as March-May 2008 where some buying support held up the market & even caused the index to stage a decent rebound. That rebound soon frizzled out & the market continued its decline in June 2008. Among technical analysts, the April-May 2008 rebound is known as a bear rally.

The big question to ask is whether the European financial turmoil would blow up over the next few weeks & if so, how it would impact global equity markets, including Malaysia. Until these questions are resolved satisfactorily, our market will be in a holding position- neither retreating nor gaining ground- with support at 1442-1443 & resistance at 1480-1483. See Chart 2 below. A breakout in either direction would point the way forward for our market.

Chart 2: FBMKLCI’s daily chart as at Sept 12, 2011 (Source: Quickcharts)

Sime is going down, while E&O is going up

Sime broke below the psychological-cum-horizontal support of RM8.00 this morning. As at 10.00 am , it was trading at RM7.82. Its next strong horizontal support is at RM7.40-7.50 & thereafter at RM6.50-6.60. Sime broke its long-term uptrend line a few weeks earlier (here).


Chart 1: Sime's weekly chart as at Sept 19, 2011_9.20am (Source: Quickcharts)

What could have triggered the selldown in Sime? There are two possible suspects: the poor market sentiment which afflicted everyone or the recent acquisition of a 30%-stake in E&O which could turn into a MGO due to the structuring of the deal. See my earlier story.

Strangely, E&O shareholders are also worried that Sime may not have to undertake a MGO. Its share price dropped off from a recent high of RM1.78 to a recent low of RM1.46. E&O is now trading at RM1.57.

We do not know how the Sime's partial acquisition of E&O will pan out. Even if Sime managed to get an exemption from making a MGO, the deal is not bad for E&O. In fact, there are a few things that are going in its favor. There are as follows:
1) Sime's deep pocket would enable E&O to develop the next phase of its Tanjung Bungah project at a faster pace;
2) E&O can tap into Sime's huge landbank in order to carry out more JV property projects; and
3) The vendors of the 30%-stake are still holding a sizable chunk of shares in E&O. This would give them a strong incentive to look after the interest of E&O. Of course, one would still be a bit sore that they have benefited from the proposed sale of their personal stakes at a price that's higher market price while the minority shareholders are not privy to the transaction. Then again, that's the privilege of holding a sizable stake which enables one to command a premium in the market.

Based on these 3 reasons, I believe E&O is a good stock to accumulate if the share price were to drop back. From the charts below, I see E&O's immediate support at the intermediate uptrend line support at RM1.48-1.50 and thereafter at the horizontal lines at RM1.45 & RM1.35.



Chart 2: E&O's weekly chart as at Sept 19, 2011_9.20am (Source: Quickcharts)



Chart 3: E&O's daily chart as at Sept 19, 2011_9.30am (Source: Quickcharts)

BIG NEWS- Central Banks Intervened to fund European Banks

The biggest story yesterday was the coordinated central bank intervention which opened the spigot for USD funding for liquidity-constrained banks, especially European banks (here). There was rumors that some European banks were facing difficulty in obtaining USD funding (here). There is another story that U.S. Treasury Secretary, Tim Geithner has suggested that Europe comes out with a rescue package along the same line as the U.S. TARP (here). This big news & the "EURO-TARF" story have caused a big rally overnight in Europe, with the major indices such as CAC & DAX gaining about 3.2-3.3% while FTSE jumped about 2.1%.

Is this a game-changer? Not yet. The coordinated central bank intervention alone is not enough. It is a move to stabilize the market. However, the EURO-TARF idea could be a game-changer. I still can't see how Greece can avoid a default with its mountain of debts.

Armada- the goose that laid the what?

Remember the mad rush to issue CWs on Armada which I've posted in July (here). At that time, Armada was trading at RM4.18. The stock has dropped to RM3.58 today.


Chart: Armada's daily chart as at Sept 15, 2011 (Source: Tradesignum)

Imagine how much premium has been squeezed out of each CW. If it is any consolation, the exercise price of all these CWs (except for Armada-CF, CH & CI) are still below the current market price of the underlying share. This means that the CWs (except for Armada-CF, CH & CI) have some intrinsic value. As readers are well aware, CWs value comprises two components- the intrinsic value (which is calculated by deducting the exercise price from the market price & then divided by the exercise ratio) and the conversion premium. The latter is the wild card & it depends on the overall market sentiment as well as the performance of the underlying share. In the current market environment, the conversion premium cannot be good.

I have tabulated the CW's valuation below (as Table 1). Since my earlier post, another two CWs were issued. We can see a decline in value of more than 30%. The exceptional case is Armada-CG, which dropped by a smaller percentage of 20%. That CW is hardly traded & the reference price may not be the fair price. In fact, only 4 of these CWs were traded today. They are Armada-CA, CC, CD & CE. Without active trading, the fair value of the CWs is hard to determine.


Table 1: Armada's CW valuation table



Table 2: Armada's first 7 CWs prices on July 29 & September 15

When I was preparing this post, I've also checked on the number of CWs issued for the largest IPOs in the past 3 months, such as MSM, PChem & MHB. I was quite shocked to see that there are 10 CWs & 1 PW issued for PChem alone! Structured Warrants, the gift that keeps on giving.

JTInter broke its long-term uptrend line

On August 17, I have posted on JTInter (here). I concluded as follows:

Based on good financial performance & reasonable valuation, JTInter could be a good stock for long-term investment, especially if you are looking for a steady income. However, the recent technical breakdown could not be ignored. It could be a warning of more correction ahead. For those with a position in this stock, you may want to reduce your position on any rebound above RM7.00. The stock is a good buy at prices below RM6.00.

Alas, the stock failed to come close to the RM7.00 mark since the post. It did manage to climb back about the long-term uptrend line for a short period. It has however broken below its long-term uptrend line at RM6.80 in early September. Based on this technical breakdown, I would rate JTInter a trading SELL.

Since the stock rose from a low of RM3.50 to a high of almost RM7.50, a good level for re-entry into the stock would be after a retracement of 38-50% (or a price decline of RM1.50-2.00) to RM5.50-6.00.


Chart: JTInter's weekly chart as at Sept 15, 2011_plotted on log scale (Source: Tradesignum)

Blue chips are also topping out...

Over the past few days, our market has been very lethargic. When European & US markets dropped, we followed. When they rebounded, we failed to rebound. In fact, if you looked closely at the individual stocks, you would notice that more & more stocks are going down even though FBMKLCI was relatively unchanged. The reason is for this dichotomy is that a few blue chips are holding up the index when many stocks are loosing ground.

If we looked at the monthly charts, we can see FBMKLCI has peaked & is poised to drop. This is based on the MACD & RSI indicators turning downward. We should note that the ADX is dropping but the -DMI has yet to cut above the +DMI. This means that the downtrend has yet to start. However, if we have waited for the ADX to flash a warning on a monthly chart, that warning would be too late for effective action. In my opinion, the signals from MACD & RSI are sufficient to put us on guard & to step aside from the market. For the Chinese readers, you can check out my column in Merdeka Review for this week (here).


Chart 1: FBMKLCI's monthly chart as at Sept 2, 2011 (Source: Tradesignum)

I have also appended below the charts of a small selection of finance stocks (CIMB, PBBank & AMMB); construction stocks (IJM, Gamuda & YTL); building material stock (LMCEMT); property stock (SPSetia); and auto stock (TChong) which have also shown clear sign of reversal. This is a small selection because other stocks have not exhibited clear-cut reversal. These coupled with the weakness in 2nd & 3rd liner stocks, are signs that the market may not be able to stage a decent bear rally, as expected earlier.


Chart 2: CIMB's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 3: PBBank's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 4: AMMB's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 5: Ganuda's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 6: IJM's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 7: YTL's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 8: LMCEMT's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 9: SPSetia's monthly chart as at Sept 2, 2011 (Source: Tradesignum)



Chart 10: TChong's monthly chart as at Sept 2, 2011 (Source: Tradesignum)

KPJ & Guanchg are still standing

KPJ & Guanchg are still hanging onto their uptrend line. KPJ's uptrend line support is at RM4.20 while Guanchg's uptrend line support is at RM2.50.


Chart 1: KPJ's daily chart as at Sept 13, 2011_plotted on log scale (Source: Tradesignum)



Chart 2: Guanchg's daily chart as at Sept 13, 2011_plotted on log scale (Source: Tradesignum)

PMetal, KSL & YTLCMT broke their uptrend line

The following stocks have broken their nice fitting uptrend line. The breaking of an uptrend line gives rise to two possibilities. It could be either a trendless movement or a downtrend. In a bearish market, the chance of a stock going into a downtrend is higher than the chance of it going into a trendless movement. Thus, it is prudent to sell or reduce our exposure once an uptrend line has been violated.


Chart 1: PMetal's weekly chart as at Sept 14, 2011 (Source: Quickcharts)



Chart 2: KSL's weekly chart as at Sept 14, 2011 (Source: Quickcharts)



Chart 3: YTLCMT's weekly chart as at Sept 14, 2011 (Source: Quickcharts)

Four 'Political' stocks that gauge retailers' sentiment

On our exchange, there are four stocks that retailers consider as political stocks. due to the perceived link to the ruling party, UMNO. Fifteen or twenty years ago, these companies were owned by UMNO-controlled companies or persons with close ties with UMNO. Today, two of these companies belong to the Government while the other two are still linked to UMNO. UEMLand is controlled by Khazanah while MRCB is controlled by EPF. Retailers would not be deterred by such minor legal points and they would buy any one of these stocks for a good punt. As at yesterday, all four stocks are resting on their respective uptrend line. A drop of 10 sen or more would change their technical outlook from cautious to bearish.


Chart 1: UEMLand's weekly chart as at Sept 13, 2011 (Source: Quickcharts)



Chart 2: MRCB's weekly chart as at Sept 13, 2011 (Source: Quickcharts)



Chart 3: Media's weekly chart as at Sept 13, 2011 (Source: Quickcharts)



Chart 4: KUB's weekly chart as at Sept 13, 2011 (Source: Quickcharts)

The collective technical outlook of these stocks will tell a tale of the sentiment of the Malaysian retail players. Are they about to throw in the towel?

Mudajaya broke its strong horizontal support at RM2.40

Mudajaya has just broken below its strong horizontal support of RM2.40. As at 12.00pm, it is trading at RM2.32. Unless a quick recovery occurs, Mudajaya will continue to slide lower. Its immediate support is at the psychological RM2.00 level. Thereafter, it may see support at the potential uptrend line support at RM1.80-1.90 and then at the horizontal line at RM1.50. See the two weekly charts below.


Chart 1: Mudajaya's weekly chart as at Sept 14, 2011_11.30am (Source: Quickcharts)



Chart 2: Mudajaya's weekly chart as at Sept 1, 2011_plotted on log scale (Source: Tradesignum)

SPSetia is coming up against a strong support

In July, I have pointed out that SPSetia had broken its intermediate uptrend line at RM3.90 (here). The stock has since broken below the strong horizontal support at RM3.75 & RM3.50. It is poised to touch the long-term uptrend line at RM3.20. The RM3.20 level is not expected to yield easily when tested as it is also the strong horizontal support. This could set the stage for a technical rebound. The brave & agile traders may try to trade this technical set-up. If you choose to do so, you are advise to set your protective stops.


Chart: SPSetia's weekly chart as at Sept 12, 2011 (Source: Tradesignum)

IJM broke its long-term uptrend line

In May, we have noted that IJM was exhibiting some technical weakness as it tested its long-term uptrend line at RM6.00 (here). I have commented that if the share price were to drop below the RM6.00 level, the technical outlook would turn bearish. IJM has however rebounded in May & went to a high of RM6.50 in July. In early August, IJM broke its long-term uptrend line at RM6.25. It is now hanging onto its horizontal support of RM5.70.

Based on this technical breakdown, IJM's uptrend is over & the stock is likely to drift lower. As such, it is advisable to reduce our position in this stock.


Chart: IJM's weekly chart as at Sept 12, 2011 (Source: Tradesignum)

Sime broke its uptrend line

Sime broke its uptrend line at RM9.00 in early August. It has been struggling to hold onto the horizontal line at RM8.80 for the past few weeks. Its next support is at the horizontal lines RM8.10 & then at RM7.40. Given the poor market sentiment & the bearish technical outlook for the stock, I think one should reduce his or her position in Sime.


Chart: Sime's weekly chart as at Sept 13, 2011_3.45pm (Source: Quickcharts)

Other rubber glove stocks also dropping...

Earlier, we have noted that Topglov had broken below the strong support of the horizontal line at RM4.70. The stock has dropped significantly since then and today, it nearly tested the psychological RM4.00 support. The other rubber glove stocks, except for Harta, have also broken their strong support. Supermx is breaking its horizontal support at RM2.70 (see Chart1), while Latexx will soon test the horizontal line at RM1.35 (see Chart 2). Kossan, which broke its horizontal line at RM2.85, is drifting lower. It may soon test its next support at RM2.50 (see Chart 3).


Chart 1: Supermx's weekly chart as at Sept 13, 2011_3.30pm (Source: Quickcharts)



Chart 2: Latexx's weekly chart as at Sept 13, 2011_3.30pm (Source: Quickcharts)



Chart 3: Kossan's weekly chart as at Sept 13, 2011_3.30pm (Source: Quickcharts)

The price of rubber latex remained quite firm, which may continue to impact the bottom-line of rubber glove producers. However, these companies may benefit from the strengthening of the USD, which we have noted earlier.

China to buy Italian bond

The latest & most intriguing story coming out of Europe is that China is going to buy more Italian bonds, possibly as much as 7-billion euro. For more, go here or here.

Here are some points from the article:

1) China Investment Corp chairman Lou Jiwei led a delegation to Rome last week to speak with Italian Finance Minister Giulio Tremonti and Cassa Depositi e Prestiti -- "a state-controlled entity that has established an Italian Strategic Fund open to foreign investors." This is one of multiple meetings between Italian and Chinese officials.

2) China already holds a significant amount of Italian debt -- one Italian official told the FT it holds about 4% of Italy's 1.9trillion euro public debt.

3) Sources specified in the report are "Italian officials." They said further negotiations will be forthcoming.

(Source: Clusterstock)

This breaking news led to some late buying, which trimmed losses among major European markets overnight.

Update: I agree with the opinion of Pragmatic Capitalism, that this Chinese move will have very limited impact. To wit:

China can “help” ease the strains in the Eurozone by buying bonds of various periphery nations. This helps kick the can in the debt game, but does NOTHING to solve it. We know this because we’ve already seen this movie once before. China made waves last year when they announced a firm commitment to buy Greek bonds. Of course, this announcement soothed markets for a few months and then the underlying trends took hold again and we all know what’s going on in Greece today.

For more, go here.

China's encouraging trade numbers for August

Clusterstocks has an article which stated that China's trade gap in August came in much narrower than expected (here). Its report was in turn based on a Nomura's report, which noted:

China's import and export growth both surprised on the upside in August. Because of a surge in imports, the trade surplus narrowed sharply to US$17.7bn from US$31.4bn. The strong rebound in nominal import growth reinforces most other activity data, suggesting that the economy is experiencing only a gentle slowdown. The details suggest that the rebound was not simply due to higher import prices. Indeed, the volume of iron ore imports rose by 32%, y-o-y in August, and import volumes of big-ticket items like cars and airplanes grew by 38% and 43%, respectively. We believe this strong domestic demand will help to support an economic soft landing in the coming months. New loans in August climbed to a higher-than-expected RMB548.5bn from RMB492.6bn in July. August M2 growth slowed to 13.5% from 14.7%. The decline of M2 growth appeared to have been largely driven by lower FX purchases by the PBOC in August, which were due to the narrowed trade surplus.

Another Japanese research house, Daiwa Capital Markets cautioned against reading too much into the trade numbers, however, saying that August figures are distorted by a surge in shipments ahead of the holiday shopping season starting in the fourth quarter. This was reported by Market Watch (here). Other data released over the weekend showed money-supply growth slightly below expectations, while loan growth was modestly higher than expected.

The strong demand for iron ore has contributed to a sharp rally in BDI over the past few weeks. The positive trade figures from China & the pick-up in BDI are the two of the very few good news in an otherwise gloomy global economic landscape.


Chart: BDI's daily chart as at Sept 9, 2011 (Source: Investmenttools.com)

KEuro- an interesting stock worth close tracking

In The Edge newsletter, there is an article about KEuro finalizing the deal to construction the West Coast Expressway (WCE). Construction work may start end of the year. This may explain the sudden jump in the share price of KEuro last Friday. The stock tested the medium-term downtrend line at RM1.10. IF Keuro can break above this downtrend line, that would be very positive as it would signal the end of the downtrend. (Note: KEuro rose to a high of RM1.14 this morning. As at 9.50am, it is trading at RM1.10.)


Chart 1: KEuro's daily chart as at Sept 9, 2011 (Source: Quickcharts)

However, we must note that KEuro has broken below the accelerated intermediate term uptrend line (S1-S1) at RM1.00 in the middle of August. Nevertheless, the stock managed to stay above its strong horizontal support at RM0.87. The strong rally on last Friday sent the stock back above the accelerated uptrend line, S1-S1 at RM1.05. Can it stay above this level?


Chart 2: KEuro's weekly chart as at Sept 9, 2011 (Source: Quickcharts)

IF KEuro can break above the medium-term downtrend line at RM1.10, the stock could be a trading BUY. Given the poor market sentiment, I would not be surprised if the stock failed to do so. In that event Keuro were to slide back to lower prices, I believe this stock could be an interesting long-term investment stock, with good entry level at RM0.90-1.00.

The financial closure for the WCE concession agreement & the huge tract of land (of 1878 acres that was awarded by the Selangor state government as compensation for the termination of the Canal City project) are the two valuable assets of KEuro. These two assets should generate strong income for the company over the next 5-10 years. For more, check our RHB's research report (here); an old article in The Edge (here); & the latest article in BTimes (here).

Note: The technical analysis in the BTimes article by well-known technical analyst, SN Lock differs from my analysis. The difference is due to the drawing of the trend lines. This goes to show that technical analysis is an art. The same can also be said about fundamental analysis where projection about future earning & assumption about investors' risk appetite- both directly affect the valuation of stocks- call for subjective judgement and as such is also an art. Like any art form, technical or fundamental analysis is applied differently by the users due to their different background. There is no right or wrong answer. As any seasoned trader or investor can tell you, the most important thing to have is a flexible mind and the humbleness to admit that the crowd is always right.

USD strength signals more trouble ahead

The financial markets are so confused these days that one may find it very hard to distinguish between noise and the big move. In July, I had highlighted that USD index was breaking above its downtrend line, which could lead to an upside rally (here). However, the rally did not materialize due to concern about a US government debts default (here).

Last week, USD again broke above its downtrend line at the 74 mark and continue to rise to close the week at 77.19. The rise of USD coincided with heightened fear of a default in Greece. It seems that everybody has given up on Greece (here). My fear is that the G7 finance ministers meeting last week was to trash out contingency plans in the event of a Greece default.

One very interesting article was published by Macronomics, entitled "Chandrasekhar Limit" in which the publisher, Martin quoted a friend from the Credit space which agrees with Martin's take that the Credit Market is fast approaching Terminal Velocity. The friend wrote as follows:

“European banks seems to be facing a US dollars funding problem as no investors is willing to lend (buy a CP/CD) with a duration over 1 week. That information, if confirmed, is of significant importance as it has major implications not only in the money market (the spread OIS/Libor is at the widest for almost 2 years and keeps on worsening- 1rst confirmation), but also FX basis market (the basis swap between currencies has been deteriorating significantly and stands at -60 bps versus -10 bps 4 months ago -2nd confirmation). IF the trend remains unchanged in the coming weeks, the casualties may be the following:

1) a US dollar rally against most currencies as there is both a lack of US dollars in the funding market, but also because most of the players are short US dollars versus currencies with higher yields ( Haaa … the famous carry trade may suffer a blow, and unwinding positions may be costly and create dislocations).

2) a leg down in the commodities universe (except for Gold) as a most of those are US $ denominated.

3) a leg down on the equity market as the losses from a higher US dollar will have to be offset by some unwinding on liquid assets (Welcome margin calls !!!). In addition, a higher US dollar versus Euro means lower earnings for the US corporations (non-withstanding slower growth in Europe, a major trade partner for the USA).

4) a worsening credit market as banks funding problems have a direct effect on the overall spectrum of the economy.”

I agree with the above scenario. Based on this & the sharp fall in global equity markets last Friday, I expect our market to drop this week. You should exercise caution in the face of the current global financial turmoil. Be prudent & avoid taking unnecessary risk.

Chart: USD's daily chart as at Sept 9, 2011 (Source: Stockcharts)

A real cliffhanger!

Yesterday, I caught up with a fellow remisier, who goes to the same Fitness First branch as I. He came in later than usual and looked a bit under the weather. I asked him whether he was held up by increased trades or orders. No, he said he had to talk to a client who kept pestering him for stock recommendations. The client felt that the market has dropped sufficiently and wanted to get into the market. My remisier friend felt otherwise. I can imagine the discussion must be quite stressful for my friend. I however commended him for being a professional. I know of remisiers who 'encourage' their clients to buy even after the market has topped or to sell even after the market has bottomed. This type of remisiers put paid to the expression "Ignorance is bliss". They in fact perpetuate the same ignorance in their clients and benefit from the clients' foolish action.

While the market is very likely to have made a top, there are sufficient buying support to keep the market at the current level. Whether this buying support can overturn what looks like & feels like the beginning of a bear market, we cannot be absolutely sure. For all we know, the market may surprise us & put in a strong recovery, despite all the negative signs and prognosis. Humbleness is a quality that all market players must have. So, if your friends or clients were to ask you, where are we in the market now? Use the following analogy to explain to them.

We had just fallen off a cliff but managed to somehow hang on to a branch, not far from the top. Can we climb back up? Are we fated to fall to our death?


(Source: cartoonstock.com)

Help may be on the way! Fed is about to start QE3! ECB and IMF may clobber a plan to save Europe. China may stop its inflation-busting monetary policies. But, bear in mind that even the best-laid plans can go astray.


(Source: cartoonstock.com)

As a precaution, take a parachute. It may weigh you down, but it will break your fall. Alternatively, you should travel slowly and inch forward carefully. So, if you feel very strongly about investing in the market, buy defensive stocks, such as utilities & consumer stable, and accumulate them slowly. Have a nice weekend!