Thursday, February 23, 2006
Markets Are Always Looking For Reasons
Be Smart Buyers Of Stocks
How do you characterise the minor correction, particularly in second and third liners, over the last few days? It is a normal occurrence, especially in a bullish market. I do not trade the market anymore for short term gains (i.e. less than 10 days turnaround).
Whenever you say that you like a stock, there will always be some who will question your integrity the moment it dips. Let's be fair here, an opinion on a stock is just that, an opinion, not a fail-proof trading idea. Certainly not one that will provide for the immaculate in-and-out. Hence when you buy a stock, do not be flustered if the price drops soon after - always ask if the basis, justification and grounds of your purchase are still intact. If they are, everything should even out in the end.
Market rallies such as the one seen on KLSE for the past month needs to be understood further. The leaders of the market for the past one month were second and third liners, that should be easy to spot. That also meant that the beta of these stocks (volatility) are very high. Barring any "bad news", the rally should continue for some time. Markets are always looking for reasons, either to go up, or down. The skill is in spotting what is "reason enough". Bull markets tend to brush away a lot of negative news. Bear markets tend to brush away a lot of good news. Deciding on what will turn the tide - well, like they say, you have pay the tuition fees, man!
When markets run up like it did for the past month - fair and not overly excessive - all participants are looking for reasons to correct. Usually a run will last 1-2 weeks tops, and then correct slightly before moving forward again. Prolonging the bull run will only build up the anticipation of a correction even more, thus making the correction quantum more severe than it needed to be, when it finally arrives.
Discerning between what is "really bad market moving news" - usually they are new news (not the ones that are heard once a week like GDP growth forecasts; or another economist's bearish prediction; or research houses sell recommendations; etc.). They may involve a corporate scandal/ manipulation/ CBT. The bird flu thing which cropped up last week was a good example of largely unanticipated news. I do not think the market's over-reacting here because Asian countries have seen examples of the effect it can have on the real economy should portions of the economy shut down.
Markets are necessarily a discounting instrument. It tries to discount all the realistic projections, net present values, etc... as best it could. If the market really thinks that Malaysia's GDP would grow by 8% in 2008 - the stock market would move up to try and discount that properly. In general, the stock market cannot look too far ahead, 12-18 months is about as far as it will go as studies have shown that markets seem to regard anything longer than that as too wishy-washy to take into account properly (i.e. too many variables and things can happen to change the equation).
I have stated that I am bullish for Asian stocks this year, and I have not seen anything that would derail that, with the exception of a full blown bird flu epidemic.