Market Outlook as at November 14, 2011

FBMKLCI is tracing out the 3-fan uptrend line. It is barely holding above the 3rd fan-line. A breakdown of this fan-line could signal a sharper correction for the index.


Chart 1: FBMKLCI's 60-min chart as at Nov 14, 2011_4.00pm (Source: Quickcharts)

The weekly chart shows that FBMKLCI would encounter fairly strong resistance at 1471-1482 (see Chart 2). The monthly chart shows that FBMKLCI's earlier sell signal is still intact (see Chart 3).


Chart 2: FBMKLCI's weekly chart as at Nov 14, 2011_4.00pm (Source: Quickcharts)



Chart 3: FBMKLCI's monthly chart as at Nov 14, 2011_4.00pm (Source: Quickcharts)

The movement of FBMKLCI index is mirrored by the movement of the Finance index, as finance stocks constitute a significant proportion of the FBMKLCI. We can see that Finance index is also tracing out the 3-fan uptrend line and it is now resting on the 3rd fan-line.


Chart 3: Finance's 60-min chart as at Nov 14, 2011_4.00pm (Source: Quickcharts)

From the weekly chart (Chart 5), we can see that the Finance index will also facing stiff resistance at 13500-13600 level. The sell signal from the monthly chart (Chart 6) is still intact.


Chart 5: Finance's weekly chart as at Nov 14, 2011_4.00pm (Source: Quickcharts)



Chart 6: Finance's monthly chart as at Nov 14, 2011_4.00pm (Source: Quickcharts)

Overall, we can see that FBMKLCI has reached a strong resistance. To bring the market above this resistance would require a game-changing event. That event is probably a satisfactory resolution of the European sovereign debt problem but that is not insight yet. On the other hand, if this event spins out of control, like 2008, the market could very easily continue with the prior downtrend.

That the global equity markets have recovered so well over the past 6 weeks is probably due to the strong economic data coming out of the US. The slew of positive economic data was a bit surprising as they contradict the predictions of a few renowned economists such as Roubini as well as some highly regarded economic forecasters, such as ECRI. Are investors being a bit too casual about the risks of a possible collapse in the Euro zone? If in August & September, investors were spooked by the European problem (deja vu again?), they have now grown accustomed to the problem that never seems to go away nor blown up.

As fund managers are reluctant to commit more funds to the market and yet they cannot step away from the market, the broad market barometer, FBMKLCI would likely hover around the 1450-1480 level. In this vacuum, speculators step up to the plate to pitch their wares- 2nd & 3rd liners.

I read somewhere that one of the conditions for a bubble is the presence of a new group of investors who had never experienced the busting of a bubble before. This means that a new bubble would only appear after a 20-year gap. The bull run of 1993 was 18 years ago. The Second Board bull run of 1996 was 15 years ago. If you are not too exacting, I would say that the condition is now ripe for a narrow bull run in our market.

Like the Second Board bull run of 1996, the developing bull run would probably be focused away from blue chip stocks- preferably cheap stocks that had bottomed out for a very long time. It is not material that the stocks are not fundamentally sound. After all, Harvest has clearly shown us that being a loss-making company with sizable accumulated losses is not an impediment to a good play. Finally, the stocks must have a good story. It is not material that the story does not sound logical. Harvest's recent news flow seems to stretch one's imagination & does not justify the current valuation. If possible, the stock should include some personalities of some significance (eg, a relative of some ministers or former ministers). If a stock fit some of the above conditions, the stock could be a good candidate for a play.

Like any good plaything, there is this small inconvenient caveat attached- Buy at your own risk. And, what risks you are taking on! These are high risk, hopefully high reward speculative play. Many Second Board stocks traded above RM10 each in 1996 and then dropped more than 90% over the next 10-15 years. Some were subsequently de-listed or underwent massive capital reduction. In fact, one such unfortunate shipwreck is now being played up. It is Harvest!


Chart 7: Harvest's monthly chart as at Nov 14, 2011 (Source: tradesignum)

Good luck!