Tuesday, June 09, 2015

Market Outlook as at June 8, 2015

FBMKLCI is struggling to avoid entering into a long-term downtrend. It needs a miracle- a strong rebound- to escape what looks like a losing battle. The signs are all there:
1) FBMKLCI is now below the 30-month EMA line. In the past 3 instances when this had happened (A, B & C), the market entered into a bear market.

2) 20 & 30-month EMA lines have both flattened. This is the precursor to both these EMA lines turning south. Again, these are present in the 3 instances mentioned above.

3) MACD has already cut below the MACD signal line. Again, these are present in the 3 instances mentioned above.

4) Slow Stochastic have gone below the 50 level. Again, these are present in the 3 instances mentioned above.

Chart 1: FBMKLCI's daily chart as at May 21, 2015 (Source: ShareInvestor.com)

What would trigger a sharp drop in the market? There are a number of possible triggers, such as a sharp fall in Wall Street or Shanghai, a nasty market reaction to Greece's highly likely exit from the European Union, a blow-up in Ukraine and, of course, a fallout from 1MDB.

If the bear market were to set in, there is no telling how low the index may go. While we can see support at 1700, 1670 & 1600, I believe that the bottom could well surpass these levels. If we use the upward channel as a guide, it is possible for the index to go as low as 1200.

In view of the above, I believe we should be very careful in this market.

2 comments:

Dr. B said...

Hi Alex

If the market does go to 1200 does it mean no stock will not be safe. What would happen to the stocks that you recommended a buy such as Sign and Evergreen. Will it be safer to wait and buy when market is lower? I notice these stocks, especially Sign, defied the poor market sentiment.

Alex Lu said...

Hi Baran Razali

The probability of FBMKLCI hitting 1200 mark is not high. It is a possible event, not a probable event.

It is not hard to understand the difference between what's possible and what's probable. It is very difficult to translate that into investment plan. For example, Harbour did quite well in the past 2 months. It is probable that it would encounter resistance at RM2.50-2.80. In which case, the safe course of action in an uncertain market is to take profit. However, it is possible that Harbour could blow through these resistance and make new high.

The thing to bear in mind for market as a whole is that the overall market is much more stickier in its directional move or trend than a stock or a sector would be. The reason is that the overall market has much more participants and the market can get support from the government/central bank because it is both a barometer of the economy as well as an important factor determining how economic players conduct their affair.

My readers would remember - though they may not say it - that I was pretty bearish on the overall market in 2011. I called the market top more than once then and the market had proven me wrong in those occasions. While I am glad the market did well in 2011, the wrong prognosis made me more careful in making broad market call.

Today we are seeing massive liquidity slouching around the globe- hunting like wolf packs - in order to buy up anything and everything that's "cheap". Whether an asset is cheap or expensive is relative. In a world where interest rate is near zero, everything is made cheaper and it would automatically be bought up until it is no longer "cheap". What if interest rate starts to go up? What is fair value in an environment of near zero interest rate would suddenly look expensive. Those who are holding onto these assets would rush for the door. You would have a one-way trade; the steady buying - brought on by the sea of liquidity - that we are seeing today would turn into a tsunami of selling. There will be no liquidity just when you need it. When would that happen? Who knows?!

Until then, all assets, including equity, are being assessed under the near zero interest rate environment and they are being steadily bought up. Can you afford not to partake in this market?

I can only say that the safer course of action is to reduce your exposure in the market and invest cautiously with the capital that you put to work or put at risk. Harbour has proven that a stock can rally very well if the fundamentals and technicals are aligned. I hope to recommend more of such stocks to help my readers to succeed in their investment plan.

Good luck!