CAKAP MACAM TAK CAKAP.
Written by Maybank Investment Bank Equities Research
Tuesday, 30 June 2009 10:27
THE Kuala Lumpur Composite Index’s (KLCI) swift rise from its low of 836.51 points on March 12, 2009 to its recent June high of 1,095.91 had caught many investors and traders by surprise.
The move threw negative valuations off very quickly and may indicate that the economy is recovering at a much faster pace than expected.
What is the market saying? As of now, the market sentiment has definitely improved but is not as bullish as the March-May period.
The ‘amazing rally’
We are now aware of the KLCI’s firm bullish sentiment with its astounding jump since March. Looking at some of the regional indices from January to June 2009 (measuring from their lows of March to their highs in June), Jakarta rose 69.99%, Singapore climbed 66.55%, South Korea gained 44.77%, Hong Kong leapt 68.91% and Japan tagged on 44.86%.
Confusing signals
Price volatility will be synonymous with these turbulent times as the market is running up faster than we can process our thoughts or make wise investment decisions.
A more positive news slant suggests that the worst may be behind us. As global economic data seems to be better than expected, green shoots are said to be in sight, with economists assigning various letters to help explain the different kinds of recovery phase, from “V”, “U”, “W” to “L” that denote the time frame that the global economies take to come out of a severe economic slowdown.
What are the markets telling us?
The market is clearly saying valuations are cheap despite stock prices trading at unusually high PERs.
It appears positive for the Malaysian economy as it is recovering much faster than economists expected. But, is that what we are really seeing? To better grasp and interpret what the market is trying to tell us, we have developed a market breadth indicator based on our parameter on the cumulative gainers and losers of the KLCI, commonly known as the Advance-Decline Line (A-D Line).
This may not be a leading indicator
But the usefulness of this indicator lies in its breadth or volume measurement. It helps us take a step back to visualise the market from a bigger perspective on how bullish the current market sentiment is. This indicator indicates the underlying strength and market sentiment of the KLCI. The concept behind this is to measure the gainers against the losers and the cumulative difference is totalled to get the net effect.
So what does the A-D Line say?
Looking at Chart 2, we can clearly see market sentiment improving at the end of March. As market breadth gained momentum, the KLCI also began to trend upwards before dipping due to the news of the Influenza A-H1N1 outbreak.
Despite the negative news, the market continued to be well supported by improving investor sentiment, which peaked on May 14.
Despite the market sentiment peaking, the KLCI continued to ascend, suggesting that the underlying market sentiment was changing. As expected, market sentiment may yet move up but we expect a lower level for the A-D signal line in future weeks/months.
What’s the direction of the KLCI?
The market breadth index is clearly indicating signs of weakness and a lack of broader participation. It does not, however, say that the KLCI is going to fall off a cliff. As long as market sentiment remains positive, we will surely see more volatility and upward movement.
An obvious bearish divergence in the A-D Line indicator only says that investors are becoming more cautious as market valuations have run too far ahead of fundamentals and common investment sense. The lower peak also indicates that market sentiment is not as upbeat as the bullish March-May phase.
Conclusion
Market sentiment is still positive but investors are more cautious. We also sense that market volatility will remain high due to the change in the risk-to-reward ratio with higher risk but lower reward.
Investors could adopt a range trading strategy with tighter stop-loss levels to benefit from the upward movements and market volatility.
Upside targets
In our recent 3Q09 report, we have upside targets of 1,095.72 and 1,237.25 for this liquidity-led KLCI “bull”. Historically speaking, we believe that this is just a “pseudo-bull” market rebound rally in a longer-term bear market. Key retracement and resistance zones like 1,237.25, 1,248.34 and 1,275.11 may repel this rally.
Subsequently, the KLCI may head to a new low next year in the face of the still uncertain global economic environment.
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