Fundamentally, stocks are looking way attractive, whether on a price earnings (PE) or price-to-book valuation (P/BV) basis. But is it time to buy?
Those who bought two, three or even four months ago (Aug – Nov 2008), thinking they had found value, must be feeling sorry now. Share prices have fallen ferociously, especially after the October 2008 selloff. To put it simply, fundamental analysis did not work well this year (2008).
A Technical Perspective …
Under these trying times, perhaps a little help from technical charting would not hurt.
Think relative strength index (RSI), moving average convergence/divergence (MACD), Fibonacci retracement and the Bollinger band. These are among many exotic tools developed by mathematicians in their attempt to determine the future direction of stocks, commodities and indexes.
As with fundamental analysts, you have some technical analysts being bullish, and some bearish. It’s how you judge and interpret the charts. There are good analysts and not-so-good ones.
But if you look at the technical, you can see the fear in the charts. Certainly, the liquidity is there, but the confidence factor is another thing. That is why markets have yet to go up.
Unfortunately, technical analysts do not get the respect they deserve. Some fund managers regard technical analysis as hocus pocus and think that the readings are not entirely based on reality. Maybe this has to do with the origins of technical charting. In the beginning, technicians didn’t care about the “value” of a company or a commodity, and were only interested in price movements in the market.
This has changed. Certainly, fundamental analysis is important as it involves weighing the characteristics of a company to estimate its value. When paired with technical analysis, it may help the investor. Fundamental analysis tells you what to buy. Technical analysis tells you when to buy and sell. Also, isn’t the ‘E’ in PE or earnings per share (EPS) also based on forecast numbers?
Charts are based on reality. Charts reveal the actual buying and selling of a stock at a particular time, as well as the psychology of the investors trading that stock.
Certain things that cannot be explained by fundamental analysis can be better understood with the help of a chart. After all, if the charts show that a stock’s RSI is at overbought levels, the high target prices pegged by fundamental analysts may not matter. In fact, it may be time to sell.
It is interesting that technical analysis is older than fundamental analysis. The Japanese rice futures markets already used technical analysis centuries ago. Charts provide accurate reflections of the market’s present and future momentum. Good news, bad news, good profits and bad losses are all imputed into the price. So long as a chartist’s database is accurate, the output is also right.
A good technical analyst uses both fundamental and charting knowledge to make calls. For example, we need to know what the Fed (US Federal Reserve) is doing and what is happening in the economy to get a better picture of what is brewing in our charts.
Technical chartist tend to be more accurate than the fundamental analyst when it comes to tracking a stock’s volume and price breakout. Globally, it is proven that the 200-day moving average is a major support for tracking trends, and is normally 80% to 90% accurate. Another example is after a stock retraces by 50% to 60%, typically it bounces back from its support level.
Market players across the globe behave similarly. Technical chart the human behaviour. It is a good reflection of the market psychology during panic and greed.
This is especially evident when you look at the overbought, oversold and volume trend analysis.
Technical charting works better for the shorter to medium term. The accuracy is reduced for long-term trends because future policies and economic conditions are not yet known.
The indicators uses most often are the MACD, the RSI and the Elliot Wave Principle. Soo looks at the stochastics, RSI, MACD, Bollinger Band and the Fibonacci retracement. While the MACD and RSI are common tools for a chartist, more is akin to the techniques of Fibonacci retracements and extensions, as well as Elliott Wave.
Fundamental Perspective …
No indicator works all the time. Fundamentalist sometime uses technical analysis when picking stocks.
Every tool has its own deficiency. Fundamental indicators can also be lagging indicators. Sometimes, it is too late, especially when the news is already out.
Technical analysis can be helpful when there is no news flow, but it needs to be used concurrently with fundamental analysis.
Technical analysis gives you extra information. For instance, if certain shareholders are selling their shares, and they are not telling the market, the chart will show some sort of selling going on. Nonetheless, in the present (2009) scenario, nobody will be able to tell when exactly a market will bottom.
The chartist will be able to see some kind of divergence forming, or some other signs that the market is bottoming out. We can get some clues or signals. But even then, we cannot tell how reliable it is until we have the benefit of hindsight.
Based On ‘PURELY’ Technical Analysis From Past Bear Markets… KLCI Will Reverse Somewhere Around April 12 To July 19 2009 & Its Retracement Is Somewhere Between 614 And 723 Levels
Based on the Fibonacci Retracement techniques, the KLCI had since retraced slightly more than 50% retracement level of its total gain of 1263.36 points 9from 261.33 in Sept 1998 to 1524.69 on Jan 14, 2008). Judging from previous retracements, the KLCI is likely to find critical support somewhere between its 70.7% retracement level (631) and 61.8% retracement level (774).
Based on performances of the KLCI’s past bear market performances, the average bear market lasted about 4543 calendar days, or about 15 calendar months.
Taking this as the basis of calculating its time reversal, the KLCI’s time reversal is slotted somewhere between Feb 25 to March 6, 2009. The second and third time targets fall in between April 12 to July 19, 2009.
Next, on the price the retracements of its past bear markets. The average price retracements of its past six bear markets was 54.71%. This, coupled with the retracement of its bear market in 1987, gave retracements objectives from 690 to 723 levels.
Combining both of the time and price forecasts, the KLCI is likely to reverse out of its failing field trend somewhere around April 12 to July 19 2009 its retracement is somewhere between 614 and 723 levels.
A multitude of factors may eventually derail equity markets. When that happens, the KLIC is likely to fall into the confines of the time and price forecasts as detailed.
This brings us to the base building phase of the KLCI to launch its next technical rally. The next technical rebound is likely to unfold during the second half of 2009 with an upside objective between 900 to 1000 levels.
The Year of the Earth Ox Commences On 26th Jan 2009 And Ends On Feb 13, 2010 … As The Past Indicates That Oxen Always Stumbles, Before Benchmark CI Eventually Finds Its Way
The Year of the Earth Ox commences on 26th Jan 2009 and ends on Feb 13, 2010. Local investors and market punters generally seem to have high expectations as they step into the new Chinese Lunar year 2009, expecting equities to recover after a disastrous showing in 2008, linking an ox to a bull.
A positive mindset is always a good thing. But what is most important to a stock player is how the market will fare and whether one will make a lot of money and become wealthy in the coming year (Jan 2009 & Beyond).
We need to depend on authorised access of historical data, charts development, and the help of various tools and resources available to forecast the future movements and trends of the market.
In the distant past of the Year of the Wood Ox from Feb 20, 1985 to Feb 8, 1986 the benchmark Composite Index (CI) of the then Kuala Lumpur Stock Exchange (KLSE), now called Bursa Malaysia , dipped by 95.37 points or 32%, easing from the 300.45 level to end at 205.08. Prior to that, the market was already on a downward spiral due to a recession and 1985 was just a continuation of the trend.
During that period, the moving average convergence/divergence indicator triggered six rounds of buy signal, but the market failed to carve out a positive reversal pattern, as every rebound owing to oversold reason was not able to attract follow-through interest, which witnessed the key index puncturing, either at the 100-day simple moving average (SMA) or the 200-day SMA.
As for 1997, Year of the Fire Ox (Feb 8, 1997-Jan 27, 1998), the landscape was not any better. The principal index of the local bourse plunged from 1,254.42 points to the 569.51 level, losing a hefty 684.91 points, or 55% on that Lunar calendar year. However, unlike in 1985, Bursa Malaysia had a very promising start for that year, extending the upward trend of the Year of the Fire Rat in 1996.
Everyone was cheering and in a state of euphoria, with the CI marching up steadily and looking certain to eclipse the peak of the 1993 “superbull run”, but unfortunately, in a blink of an eye at 1,278.94 points on Feb 26, 1997, the stock market took a beating.
What initially appeared as a typical correction was later proven to be a total reversal, aggravated by the Asian financial crisis. Except for a brief rally at the tail end of that lunar year, the local market hardly gained lost ground until the key index touched a low of 261.33 on Sept 1, 1998 after the Government pegged the ringgit at RM3.80 to the US dollar.
As such, if one were to track the 12-year cycle (As 2009 Is The Year Of The Ox) of the previous two similar Chinese zodiac animal and make interpretations strictly on the grounds of technical analysis, the outlook appears bleak, as the past indicates that the Oxen always stumbles, before the benchmark CI eventually finds its way.
The reasons are simple. Most will recall that Bursa Malaysia was hit hard during the Asian financial crisis in 1997 and it took the market a painful 18 months to bottom out.
Now with the health of the global economy at its worst since the “Great Depression” in 1929, which will likely have an impact on the Malaysian economy and corporate earnings, the local bourse may need a longer time to heal and recover.
A peek at the historical daily charts indicates the CI is still in the progress of tracing out a perfect downtrend pattern, as in 1997. Although they dive from a different altitude, the magnitude and the characteristic of the two bears appear to be the same but the chief concern here is the “negative crossing” of the 100-day SMA against the 200-day SMA, which is still intact.
There is no easy way out. After finding the ebb, the CI must show persistent recovery and thereafter, maintain the posture above the 100-day SMA and the 200-day SMA for a period of time to untangle the “dead cross”.
Typically under normal circumstances, the whole process takes about four to six months. Only if the key index is able to fulfil these important criteria, can it lead the market back to the mending path.
There may be a little more pain coming our way and should there be any solid positive sign of the market shifting trend from bearish to bullish, it should come about in the second half of this year (2009) at the earliest.
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