Market Outlook as at February 4, 2020

Two weeks ago, our market players were cautiously positioned for a mild CNY rally. FBMKLCI was pushing against the intermediate downtrend line, RR at 1615. 

Chart 1: FBMKLCI's daily chart as at Feb 3, 2020 (Source: Malaysiastock.biz)

Then, in late December, reports surfaced of a new respiratory syndrome associated with a novel coronavirus appeared in Wuhan, China (here). Stock markets thru out the world went in a tailspin. Our Bursa inevitably joined in. FBMKLCI fell back and broke below the horizontal line of 1550 last Friday.

Chart 2: FBMKLCI's weekly chart as at Feb 3, 2020 (Source: Malaysiastock.biz)

Will FBMKLCI continue to drop to test the long-term uptrend line, SS at 1450?

Chart 3: FBMKLCI's monthly chart as at Feb 3, 2020 (Source: Malaysiastock.biz)

When everyone is running around like headless chickens, it is a good practice to stay calm and look to history for a guide. I refer to the market performance during the SARS outbreak in 2002-2003 (or, to be precise from November 2002 to July 2003). Below is the composite charts of FBMKLCI during the period of SARS outbreak and today. You will see that after the initial decline, FBMKLCI traded sideways for the next 5-6 months.

Chart 4: FBMKLCI's weekly chart in 2002-2003 & Feb 3, 2020 (Source: Malaysiastock.biz)

If FBMKLCI is not convincing, you can refer to S&P500 for that period and today.

Chart 5: S&P500's weekly chart in 2002-2003 & Feb 3, 2020 

Interestingly, the charts of the 3 glove producers listed then (Topglov, Supermx and Kossan) did not react in a sharp rally like they did in the past few days. In fact, the rally for these stocks only picked up after the SARS outbreak appeared to have been contained in July 2003.

Chart 6: Topglov, Supermx & Kossan's weekly chart in 2002-2003 (Source: Shareinvestor.com)

From the above, I can draw these conclusions:
1) Stock markets are likely to have limited downside from here.
2) The current novel coronavirus outbreak may last about 6 months
3) Glove stocks may have run ahead of fundamentals, and may correct for a while.
4) Glove stocks may begin their next upleg after the novel coronavirus appears to have been contained.
5) Broad market selldown may be a buying opportunity.