KLSE formed an important hammer today which is a strong bullish sign (especially when i presages a morning star).It was weak all day followed by a spurt of last minute buying. This occurred in the face of overnight weakness in the Dow.
And this was reflected in PBBank, which has also reached critical support.
When as many stars align themselves in this way, you just gotta take the chance. Going in tomorrow!
This week things are not getting any better. The Dow is touching 11,000 and the S&P is now at 1259. The sellers are in control with lasts weeks rally transforming itself into a dead cats bounce with no buyers willing to risk going in on dips. A few weeks ago 1000 on the KLSE was on the cards. Now, where that just seems like a pipedream. Expectation to Illusion – we learn a very important lesson in stock market psychology today on how quickly perceptions can change.
But I am not worried because I have positioned myself very lightly into the market and done relatively little buying over the past few weeks, except to sell into Tenaga today. I have however, been searching for a medium term safe haven and trying to figure out what is at play – and more importantly, where the next bull market is going to occur. Since everything has been going down so broadly that seems a bit like looking for a needle in a haystack, but here are my comments anyway, which I hope will provide some food for thought (down days are good for catching up on things like this and and reading and responding to emails…. anything but trading!) I should add that a lot of my comments, charts and ideas are drawn from my favourite blog so I have to give some credit where it's due.
Comments:
US$
Is this a mini rally or more to come? The bounce has certainly caught some off guard, but with fundamentals still weak and the latest Iraq scandal on the cards, I don't see the dollar finding strength anytime soon. However, as a de facto currency reserve, the world's governments may have no choice other than to continue putting their money into the dollar, and if the Fed keeps tightening then the dollar may struggle to sell off. The big fear is that respect is is economic growth declines and the Fed stops raising. If (and in my view, when) that happens, then we will really see a slide in the dollar.
OIL
It also perplexes me why people don't see any correlation between the dollar and oil. Oil is priced in dollars so if the dollar is weak, then the price of oil will go up. That does not necessarily mean that we are running out of oil. Secondly, it is important to realise that the biggest consumer of oil is the US, with China following closely as the fastest growing consumer. Should there be a slowdown in the demand by any of these countries, then the price of oil could easily drop to $35 (according to my favourite analysts in this review made last year). Now, despite jumping back up again this week, is oil likely to head higher in the coming months? That depends on whether you think that growth will continue or that the excesses of the past year will be purged as the world 'rebalances'. I favour the latter.
COMMODITIES
I believe that commodities are the safe haven to go into right now, except that the big fly in the ointment could be an oil sell-off and overdue correction in gold. However, they seem to have found support so I am looking to park some cash there for the moment.
US EQUITIES
Not much to say here, except that Utilities seem to have held in the past week due to expectant interest rate relief. I see them as a sort of safe haven of sorts, in the same batch as consumer staples (food, health etc.). In Malaysia, we had Tenaga. Gold also features.
and that brings us finally to:
KLSE
If you think we got it bad, just take a look at Latin America. Brazil, for example, rose almost 100% last year and got whacked more than 20% in these past few weeks. At least the KLSE only lost 4% in the past month. If last year is anything to go by, when the KLSE dropped from 950 to 880, this bear run could do the same. Despite all of our problems, I keep the faith..
In LOTR:The Two Towers, King Theoden leads his people into Helms Deep to face Saruman's forces and to protect his people. On nightfall, Saruman's forces arrive and try to scale its walls with all kinds of siege devices. Then they try to break through its doors but had a hard time because of Legolas and Gimli (Hope). Finally they managed to break through using an explosive device(Failure). At that point Theoden's forces give up and despair (Capitulation). But as that happens Gandalf turns up with Erkenbrand and saves the day (Miraculous Turnaround)…
Hope – Failure – Capitulation – Miraculous Turnaround… Sound familiar?
Question is: where are we? I'm going to put my money on the premise that we are still in the midst of failure and that capitulation has not occurred yet. So I too will take any rise in the index as an opportunity to lighten my positions. But make no mistake. My interest in the market is growing stronger and not weaker.
This is the counter I have chosen to go in lightly. It's a good company and reached the first level of resistance without violating the uptrend line, which represents another level of resistance. If it drops I will continue to accumulate.
In order to profit from lambs, it is important to understand their mindset. And the key to that is resistance. In a falling market, the question is at what point will the lambs capitulate? Once that happens, all the bulls will be driven out and prices will be at rock bottom because no one is interested in buying anymore. At that point, you, the shark, will come into feed.
Now I don't believe that we are anywhere near capitulation. You can tell that by looking at the graphs below. I have drawn a trendline which I believe represents the line in the sand for a lot of bulls. You can see that some counters have met with support there. Fair enough. It looks like there are still a few lambs out there in the process of averaging down. I myself have bought in at those levels (PPBOIL) because I don't want to miss any sudden upturns.
But I am still wary because we have not reached the point of capitulation, which I am keeping some dry powder for.
(still hope for the bulls! Enter, but lightly…)
With the market activity as it has been in the last few weeks it's clear that identifying good stocks is not enough. You also need good timing to make money. My general rule is to sell when the market is hot and buy when the chips are down. This week I am therefore a buyer. But it is important to realise that when things become extended, it may become extended for a long time. In my view the Dow was extended all the way from Feb to May, which killed a lot of bears. So when you buy into something weak, it has the ability to become even weaker (this is called an overextension). Unfortunately, nothing in the world can tell you when an overextension will end precisely. Indicators, however, can tell you how much something is overextended. My favourites are relative strength, stochastics and candlesticks, but in truth, any volatility indicator will work.My strategy is to be a buyer throughout this whole period, from the time the market is weak, to overextended, to the point where it reaches a turning point and then starts to go up again. That way I have it all covered.
This is called 'position sizing'. That means not putting all your chips into one basket but 'fading' in or out of positions and waiting to see what the market does before each move. Just like when you play chess you don't make 10 moves before your opponent. You wait and see what he does, then you make a move, then wait again. This requires patience and a lot of thinking and preparation. Not punting all your money in one shot also allows you to sleep more easily. Over time, as things rise (there will be a bull market again) you should be in a good position with a healty portfolio to become a shark.
Here's an example:
So now I have nibbled into GHLSYS, Plenitu and Digi and redeployed 20% of my cash into the market so far. Hopefully in the next few months that figure will rise to 70 or 80%. I have also invested into Japan and Singapore and bought more gold on my international portfolio.
Happy Tradin!
Michael Giacchino's (who also did the music for Alias) soundtrack for the famous TV series, which is now available, is a great study for music composers because it covers a pretty wide range of mini-genres which range from horror to romance to feel-good. The music also does different things at different points. Sometimes it is part of the narrative, evoking familiar themes and signatures. Other times it falls back and contributes subtly to the mood.
The thing which stands out, however, are the creepy numbers. There, the synthesis is top notch. Sounds morph into one another and subtle percussion trickles to create a highly evocative mood which is just downright eerie. Think of a cross between The Exorcist and Blade Runner. It is a shame that the album does not contain more of this kind of stuff, but I suppose they had to put forward a representative mix of music in a soundtrack album. The music in the non creepy scenes is not bad, but not particularly exemplary. For that kind of stuff (especially the orchestra numbers), there are other better composers to listen to such as Danny Elfman or John William. Between the music for Lost and 24, I think that the music for Lost has the winning edge because of its creepy music. (rated: 3.5/5)
Two great counters reaching support. The sharks may push them lower but I am happy to take a nibble now and add on if it keeps dropping.
Digi
Ghlsys (I have this already but will add)
I posted a note below about following liquidity. This is an essential ingredient in any market because it produces volatile price action. Take the fx market for example. This is a multi trillion market. It will never go bust like a company. It just goes up and down, up and down and a lot of people make a lot of money on it. I personally don't know any traders who have not had a hand in trading fx.
Anyway there is an added dimension to this. I personally believe that trading is a zero sum game in the short term. If you make money on one hand, there is always someone on the other who loses. That makes you 'smart money' and the other the 'silly money'. I call smart money 'sharks' and silly money 'lambs'. And the question I always ask before making any trade is: "Do I know where the smart money is?" If I don't, I know I will be killed.
Now let's take a look at the chart below which explains how I think the market will play out, analysing it in terms of market psychology between sharks and lambs.
Stage 1: This sets the scene. People start to take profit – Bad news across the world markets makes it an easy sell for those who are quick on the button. These people are happy with their gains. Those who did not sell are shocked, but hanging in there because they are still up on the year.
Stage 2: At this point, the sellers become the smart money people. They have the psychological advantage and the power to capitalise on weakening sentiment. Our sharks continue to sell, pushing the market lower. Fear starts to build. I BELIEVE THAT WE ARE AT THIS POINT IN THE MARKET. Lamb portfolios start to bleed a little. Profits are minimal. But they hang in there. Some even start to buy in order to average down.
Stage 3: This is the killer. The sharks continue to sell. Portfolios are now down in the red if they have not been liquidated. For the lambs, FEAR start to become PAIN. Sentiment is very weak. Important resistances are broken. Lambs capitulate and sell their shares. A lot of inexperienced traders give up.
Sharks start to buy, pushing up prices….
[repeat ad infinitum]
So, which camp are you in? Make it your point to find out.
Goodnight, good trading and great risk management!
I don't need to tell youhow glad I was away for the last few days having reverted a large portion of my holdings to cash. I will post more tomorrow but briefly here are my views:
1. The downtrend is not extended. It can go lower.
2. There is a bearish engulfing pattern on the weeklies, suggesting further weakness or lacklustre-ness ahead.
3. The bullish trend is still intact.
For me, the stock market is now holding a sale and I am a very happy shopper. But I am not rushing in to buy much…yet. I plan to slowly accumulate over the next few weeks.
Stay tuned!!
