Market Outlook as at May 4, 2020

On April 30, FBMKLCI rose 27 points to 1408. On the following day, which was the Labor Day, the government announced the relaxation of the MCO to allow for the opening of many sectors of our economy on May 4. This is known as the Conditional MCO (here). 

However, there were many who spoke out against the relaxation of the existing MCO as the number of Covid-19 cases was still high. In fact, the number of cases reported today was 122. The DG of the Health Ministry has reminded the public that the MCO is not fully lifted yet (here). In addition, 6 states (Penang, Pahang, Kelantan, Kedah, Sabah and Sarawak) chose not to open up early as allowed by the Conditional MCO (here). How would the market react next week?

The unfinished business of controlling the spread of Covid-19 and the uncertainty surrounding the re-opening of the economy would create confusion in the market. This will likely lead to weaker market, which may follow by profit-taking activity. 

FBMKLCI has rebounded substantially off the low in late March. However the rally to-date is still rightly viewed as a bear market rally, as the MACD is still below the zero line, and, while the +DMI has crossed above the -DMI, it has not yet pulled away. 

Chart 1: FBMKLCI's daily chart as at April 30, 2020 (Source: Malaysiastock.biz)

As discussed in my earlier post, the start of the recovery in 1998 & 2008 were accompanied by the presence of the following conditions on the weekly charts:

1. Index rose above both 10 & 20-week SMA lines
2. MACD crossed above the MACD signal line
3. Stochastic RSI was above 80 (or, in oversold territory)
4. +DMI crossed above -DMI and continued to diverge

I have updated my earlier charts, and you can see that FBMKLCI has not yet met the above conditions.

Chart 2: FBMKLCI's weekly chart for 1997-1999, 2007-2009 and 2018-2020 (Source: Malaysiastock.biz)

The success of the MCO in flattening the curve is indeed laudable. Once the number of cases has been brought down to low double digit, the opening of the Malaysian economy would be a boost to our stock market. Whether that boost will lead to a strong recovery is still a question that's hard to answer. Covid-19 will probably be with us for the next 2 years and the ensuing economic contraction will likely be brutal on the stock market. I do not see how the market can rally higher under such challenging conditions.