Post Election rally. CAN IT HOLD?

Currently there is a phenomenon sweeping through the financial markets around the world that is known as the Great Disconnect. What do you mean by the Great Disconnect?

In normal market conditions the stock market as a leading economic indicator will give an indication on what direction the economy will move. Is the rise of Global Stock Markets to record highs is of any indication that the Global Economy is recovering?

The truth is far from that because the current Global Stock Market is nothing more than a ‘reflationary rally’ that is resulted from the previous reflationary policy in Japan which seen the Nikkei 225 rising more than 40% in the last few months.

Economic Indicators

If the health of an economy be of any indication of future stock market movement then it has failed. This is because currently in many countries their economic indicators are showing signs of slowing down and yet their stock markets are moving into record territories.

Take the U.S for example its PMI a leading economic indicator of manufacturing activities all over the country is showing signs of slowing down, consumer confidence fell to 9 months low, the margin debt of the NYSE is peaking again and almost to the level of pre 2008 and the price of copper which is a leading indicator of the performance of the economy plunge 20% since January this year.

All signs are showing that the U.S economy is slowing down in the months ahead and might be going into a recession soon and yet the DJIA kept recording new highs for the past 8 days and topped 15,100. How disconnected the markets have been?

In Malaysia, if you look into our Leading and Coincident Indicators, they also showed contradicting signals with the Leading Index (grouping of all leading economic indicators) rose 1.4% while the Coincident Index (grouping of all coincident economic indicators) dropped 1.7% in February 2013. The direction our economy is heading depends on how strong both the Leading and Coincident Index perform in the coming months. If both index still shows non conformity then the chances of our economy slowing down will somewhat will be increased. However as we have said again if economic indicators are to provide any hint of future stock market movements then we can say that the performance of the FBMKLCI will not be very encouraging. However as with other global stock markets our FBMKLCI is trading in record territory.

Can the FBM KLCI hold?

We present to you below the daily chart of the FBMKLCI as of 09/09/2013.

We reckon that the FBMKLCI is over stretched at the movement. On Monday, the day after the GE13 results the market went wild and managed to record a high of 132 points over the previous day’ closing before settling for a 52.5 points gain. As for the short term we reckoned that the FBMKLCI will not be able to hold on to the gains due to the following reasons.

On the Price chart above do you notice there is a Gap at the opening of trading on Monday (06/05/2013). Gap is one of the most reliable chart patterns in technical analysis. Open gap will have to be closed sooner or later. To close the existing gap the market will need to fall back to the 1712 level which is the high set on the 03/05/2013. So from yesterday’s closing (1766 point) there is a risk the market will take a 54 points correction soon.

There are 2 divergences going on at the same time. Although the index is setting a new high but there are non conformation from its indicators. The RSI and Stochastic indicators are showing negative directions and hence weakness.

Hugh spike of volume on 06/05/2013. Whether this will represent the top is yet to be seen. Such a hugh spike in volume without follow through in the next few trading days is not a good sign.

In conclusion, we reckon that the market will be heading south soon and the next support will be 1712. Again it is best to take your profits off the table and wait for the next market setup.

Malaysia Chronicle