Friday, August 23, 2013

Market Outlook as at August 23, 2013

The FBMKLCI lost 83 points in the past six days, from 1793 at the close of 1793 to 1710 yesterday. In the process, many stocks were heavily sold down and losses about 5-10% were quite common. Before we contemplate the possible reasons for the sell-off, let's look at the chart.

From the chart, we can see that the index is now resting at the horizontal support of 1720. I consider this support and the psychological 1700 mark to be the line on the sand which is critical for the future of our market. If this first line of defense is violated, then the index could drop to the next support level, which is the horizontal line at 1650. Beyond that, we have the long-term uptrend line support at 1630.

A closer look at the chart may show possible signs of distribution in the market over the past 3 months. One may come to this conclusion with the presence of negative divergence in two indicators (MACD & RSI) as the market (or index) trading sideway (with slightly upside bias). However, this is not a hard and fast rule as the presence of negative divergences in the past 3-4 years had failed to check the market's relentless upward march. This has caused many technicians to be more lenient as they adopt the attitude of not-fighting-the-Fed. Even if you read the signs correctly, this possible distribution is rather short- a mere 3 months. Compared this with an earlier distribution in 2010-2011 which lasted 10 months.

In my view, the index must hold above the 1700 mark. A break of this level could easily send the index to the long-term uptrend support of 1630. From the strong selling that we had witnessed in the past few days, I believe many in the market have concluded that the index is likely to break 1700 level- which is a bit presumptuous. Then again, they may be taking some chips off the table or merely realizing some paper profit after a long rise.

Chart 1: FBMKLCI's daily chart as at August 22, 2013 (Source: quickcharts)

Looking at the monthly chart below, we can see that our market has been rising for the past 4 & 1/2 years. This is a very long uptrend, which nearly equal the long uptrend in 2003-2007. With many investors sitting on their substantial gain, profit-taking is inevitable in uncertain times, especially by foreign funds.

 Chart 2: FBMKLCI's monthly chart as at August 22, 2013 (Source: quickcharts)

There are a few reasons why foreign funds may pull money out of emerging markets. Firstly, the prospects for economic growth is improving in developed economies appears more exciting than the emerging economies. Secondly, as the developed economies recover, their central bankers may start to roll back their loose monetary policies- the same policies that caused money to slosh around the global earlier. The smaller pool of investable funds means that fund managers would have to be more selective and in this beauty contest, emerging markets are now losing favor fast.

However, the global economy is not out of the wood yet. Extraction from unconventional monetary policies has never been done successfully before. Japan tried a few times and fell back into the recession or deflation. The latest attempt to revive the Japanese economy is from Prime Minister Abe. Some pundits are calling this desperate attempt, the last throw of the dice.

Meanwhile, Fed has signaled that it could begin to taper down on its monthly USD85 billion bond-buying program as economic data improve. The mere tapering of the bond-buying program was enough to cause havoc in the stock market. If the market fears tapering, which is defined in Wikipedia as "the practice of reducing exercise in the days just before an important competition", what would happen when the Fed actually begins to extract from unconventional monetary policies. It would be like the end of a war, creating huge financial disruptions. Interest rate may shot up. Stock market may tank.

Meanwhile there are some reports that Malaysia may be hit by serious financial problems. One such report entitled, Malaysia will be hit: Another Asian Financial Crisis may be brewing, this time from India appeared in Malaysian Chronicle on August 21. As you well know, I do not like to criticize other people's work. Nevertheless, I have to say that the aforementioned report was highly speculative. The Malaysian economy & fiscal position is in a better shape than in late 1990s and it is unlikely that we would be hit by a financial crisis like 1998. Such reports, coming after the Fitch downgrade, would cause fear in some investors; thus prompting them to act irrationally.


leslieroycarter said...

when our personal debt is extraordinary high +/-83% as reported. Do you still believe and confident on our financial health versus other Asian countries? if our current national debts are not resolved in the near term , I doubt the fund managers and investors will come back to support our market when they have better options outside.

lai said...

For far too long, the market never had a long "holiday".

By May next year, probably?

Digital said...

If so, then good opportunity to collect pbank at rm2 again like I did in the previous time. Why the fear????....Bring it on.

clongviews said...

Thanks, Alex for the Market Outlook. As history always repeats itself the contagion effect seems real.Malaysia may not be prepared to withstand both the external and internal pressures.
Better to get out of the market now and incur some loss rather than to cling on hope against hope.Come back another day.
Will follow the chart closely. Tks.