Market Look Ahead

Hi Readers,

The first article that I have published with regards to short term local sentiment and US Dow Jones Industrial Average is bearish. Some of you texted me that market is up locally and so does US market as well. Yes, indeed market went up, however it is still too early to call it a bullish uptrend and reversal to the spike down in Dec'18. Am I taking too much risk for holding short positions? Am I going against the trend? Am I trying to time the market? The answer is No and it is calculated risk positions. 

Lets look at whats going on globally. The World Bank recently published its Global Economic Prospects and the overview: 

Global growth is expected to slow to 2.9 percent in 2019. International trade and investment are moderating, trade tensions remain elevated, and financing conditions are tightening. Amid recent episodes of financial stress, growth in emerging market and developing economies has lost momentum and is projected to stall at 4.2 percent this year, with a weaker-than-expected rebound in commodity exporters accompanied by deceleration in commodity importers. Downside risks have become more acute. Financial market pressures and trade tensions could escalate, denting global activity.

What does that means to us? For me, what it meant is that corporate earnings would be a challenge in general. This is true for both local markets and US markets and we have seen quite a few Fortune 500 companies projecting lower earnings for the upcoming quarters. From a valuation perspective, in a market where stocks seems to be "expensive", a smaller earnings (E) in the P/E ratio is a risk with the fact that global growth/economy is slowing down. In US, there is much hype going on that Fed is not expected to raise interest rates; in fact - most investors projecting two rates increase instead of original 3 rates increase in 2019 after what happened in Dec'18. That seems to be the reason driving the rebound in Jan'19 for US markets. Looks like investors are "expecting" what it should be or where it should be heading. Quite a risky bet in my opinion and I would expect volatility in the market to remain for quite some time. 

Closer to KLCI and how does it look like for economic projections perspective? On 9-Jan-2019, Nomura Global Markets Research downgraded the Malaysian equity market to ‘underweight’ from ‘neutral’ previously, on poor earnings growth prospects and higher fiscal deficit of 3.9 per cent for 2018. In response to the report, Finance Minister Lim Guan Eng issued a statement on Jan 10, saying that the Government was confident of achieving 3.7 per cent and 3.4 per cent of fiscal deficit in 2018 and 2019, respectively. This was further supported by World Bank economist saying Malaysia's economic fundamentals remain strong due to its diversified economy, despite the recent downgrade by Nomura Global Markets Research on the Malaysian equity market. Malaysia's economic growth continued to be stable and the World Bank has projected it to grow at 4.7 per cent for 2019. However, a closer look at World Bank's forecast for Malaysia GDP showing GDP is flat in 2019 at 4.7% against 2018 and drop to 4.6% in 2020. This will bring back to the valuations in our stock markets whereby a risk in corporate earnings and high P/E ratio. 

Chart extracted from World Bank websites

Now, how does the stock market looks like from technical perspective. I will compare S&P 500 index and the $VIX index. Volatility Index ($VIX) is derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors' sentiments. It is also known by other names like "Fear Gauge" or "Fear Index." Looking at the chart below, one would have noticed that the $VIX is generally trending up in 2018/2019 (bottom right circle) while the S&P 500 index is trending down (top right arrow). This is quite similar back in 2008 (on the left side of the chart). We have not seen $VIX trending up for quite some in between 2008 and 2018. Hence, volatility is still in the market despite current Jan'19 trending up for US markets. Something that all of us should be aware of. 

Comparison of $VIX and S&P 500 index during 2008 (Great Recession) and Current 2018/2019

As for KLCI, I would like to bring you back down the memory lane. Lets have a look at what happened in 2008 below. The index continued to demonstrate lower highs and lower lows during the Great Recession in 2008. Any rebound during the period is short-lived and only to see a lower low. 

KLCI Index during the Great Recession in 2008

Lets look at KLCI at the present moment now and you would have noticed that we are seeing a lower high and one low point (orange circle). We have yet to see a new significant low and current uptrend in Jan'19 for me will be capped at 1720 (yellow circle). Some of you have seen this projections that I have shared few months back (the red curve arrow; and indeed it is behaving within expectations). Unless KLCI index starts moving above 1800 levels, my sentiments on the market is still cautious and bearish.

KLCI Index currently at 2018/2019

Combining both the macro economics prospects and the technical perspective of current market behaviors, that explained the rational behind my short positions. There is no right or wrong here as this is just purely my opinions / analysis based on available information. This sharing is meant for informational purposes only and for your reading. Additionally, I am using the Jan'19 rally here to trade as per my sharing to raise cash while maintaining some long term positions in fundamentally strong counters. 

I would like to wish all my Chinese readers a Happy Chinese New Year and may you and your family be blessed with good health, prosperity and good wealth.

Cheers, 

From the family of Alpha Patterns.