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.


zentrader said...

"... with the exception of a full blown bird flu epidemic. "

What about war? Any possibility for this?

A+ for this article. :)

Salvatore_Dali said...

war - harder to predict, but nothing seems to indicate a potential war yet...

bird flu - while Malaysia and the rest of the world have reacted very swiftly, we need to ensure that this does not get worse, do stock up on yr tamiflu.

Rohan_888 said...

"I have stated that I am bullish for Asian stocks this year, and I have not seen anything that would derail that"

May be this?

"Yet as the BOJ raises rates and more investors buy into Japan's revival, the yen is sure to rise, much to the chagrin of carry-trade aficionados. Realization the trade is moving against investors may send shockwaves through global markets. It would start slowly with speculators suddenly closing positions that are becoming more expensive: dumping Treasuries, gold, Shanghai real estate, shares in Google Inc. or whatever else they used yen borrowings to bet on. The chain reaction would accelerate once the mainstream media jumped on the story. If all this sounds far-fetched, think back to late 1998, which offers an example of the damage a panic among carry-traders can do."

Salvatore_Dali said...


That is true Rohan, however I don't think the unwinding/dumping of US dollar assets scenario will play out (pls read my blog on US Dollar On Prozac & Levitra, and have a laugh). Yes, BOJ will raise rates, that largely because they cannot keep printing yen notes forever and loading the liquidity onto the market - GDP growth has been inching up in Japan for the past 5 years, all the while BOJ has kept rates at ZERO or near ZERO - that meant that BOJ has dumped a truckload of liquidity onto the system to keep rates low. As the economy enters its 5 year of growth (albeit very tiny baby ones in the first few years), the time has come to start reining back some growth - esp now that all 11 regions of Japan have together shown growth in the last couple of quarters - meaning a broad based recovery.

Rohan_888 said...


The last half year at least 90% of the BM trading days losers outnumber winners, and 100% of the days there is last minute support by "the invisible hand". The only reason the index is holding up well is because of the top 10 counters, who have more weight than the other 990.

Add to this that one of the most speculative counters (THHin) is associated to the former head of the SC, and that the current head of the BM thinks it is a good idea to swamp the market with even more rubbish IPO's.

Are these good signs for the Malaysian market? I get the impression that it gets less and less relevant in Asia let alone in the world, and for the right reasons it seems.

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