Waiting..waiting…waiting

After three consecutive weeks with a negative performance, DJIA was in a positive territory by end of November.

The Dow indicated a possibility of weekly good showings upon bearish reversal of the heavy fall below the 8,000 level, with a rebound during the last hour of the week ending 21st November. Dow opened higher above the daily and weekly Pivot Point (Pp); and the 20 period and 60 period EMA; and the downward sloping line A. Tuesday, the market showed a reprieve with a consolidation around the daily Pp and 20 period EMA. Wednesday, with next day is a Thanksgiving holiday the Dow inched upward breaking the daily Pp and bouncing from the 20 period EMA. Friday was very bullish with a gap open of the Dow at above the daily S1 pp level and subsequently breaching the S2 Pp. The Dow closed at 8,829.04 with a gained of 1,277 points, or 17%, in just five sessions, marking its best five-day percentage gain since 1932, and its best five-day point gain on record.

EWM performance.

There is a triple bottom forming last Friday and the target of the bottom was reached on Monday. The EWM than consolidate forming a triangle. I am anticipating the break to the upside of the triangle.

As mentioned on the last post, as expected the Malaysian market moved positively in early week, but went flat subsequently despite the Dow performance. The coming week will establish where is the Bursa KLSE Composite heading, since the low on Wednesday is 61.8% retracement of the swing low of October 28 and high of November 5th. My bet is that the gap experienced two weeks ago will be fill-up and a move up to 880 area. I don’t like to predict but preferring for anticipation of the flow of the market. On this basis, I believed for the past two weeks the local market sentiment has been detached from the Dow and interest on the market is dwindling. The market is waiting for any positive economic news locally or foreign news that has direct bearing on local economy.

During the week, Bank Negara cut the OPR from 3.5% to 3.25% and forecast that the economy will grow by 5% to 5.5% in 2009. Bank Negara also projected that in the fourth quarter this year, the economy was to expand by 3.5% to 4.5%.
After a string of reported weaker corporate earnings and slower domestic economic growth of 4.7 % in the third quarter of 2008, the slowest pace since the mid-2005 the impact of the news has been minimal on the market. With the 2008 almost coming to the end, December could see some assets values propping.

The iShares MSCI Malaysia Index Fund (EWM)

The chart above shown a correlated movement of KLSE Composite Index (the blue line) and EWM (the red line)

What is EWM?

EWM is an Exchange Traded Fund (ETF) that is meant to track the MSCI Malaysia Index, the iShare MSCI Malaysian Index Fund that is listed on New York stocK Exchange.

An ETF is a part of an investment portfolio traded on stock exchange just like shares. An ETF holds assets such as shares or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. The most popular ETF’s listed in Wall Street track an index, such as the Dow Jones Industrial Average or the S&P 500.

An ETF combines the valuation feature of a unit trust which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be substantially more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds,

Locally, three ETF’s are traded on the Bursa Malaysia, ABF Malaysia Bond Index Fund and FBM 30 ETF managed by AmInvestment Services Berhad, and MYETF Dow Jones Islamic Market Malaysia TITANS 25 managed by i-Vcap Management Sdn Bhd

There is one closed-end fund traded at Bursa Malaysia, Icapital.biz Berhad, managed by Capital Dynamics Asset Management Sdn Bhd.

As an index fund, EWM seeks to track the performance of an Bursa Malaysia index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index.

Trading on EWM commenced on 3rd December 1996 and EWM holds shares of more than 60 companies that trade on the Malaysian stock market.

The two charts above shown clearly the relationship between EWM and KLSE Composite Index on daily basis for the last three months.

The chart below depicted the movement of EWM as against the Dow Jones Industrial Average (DJIA). It was reported that EWM has a beta of 0.76 as against the DJIA last month. (Not a perfect correlation between EWM and DJIA).

















The chart below is a 15 mins chart of EWM for lat 10 days. From casual observation, EWM has been uptrending since the last low on Thursday. A reverse head and shoulders pattern is forming but this could not be verified since the second shoulder is not formed yet.

Last Thursday, DJIA penetration of 8,000 mental support level was swiftly reversed by the last hour of New York trading session. A double bottom was formed as a result, but the target high has been reached. The coming week market is expected to track the development of Citicorp crisis and Bursa Malaysia is expected to experience early weakness before further upward movement.

The Dow and the Currencies

The US stock market fell sharply for a second consecutive week. See the daily Dow Jones Industrial Average (Dow) chart below.

The Dow declined this week by 5.0% to end at 8,497.31 on Friday.

The Dow had a wild week especially on Thursday and Friday with all sorts of ups and downs for the two days.

The wild gyration on Thursday and Friday is shown on the chart of 15 Min Dow. Let us analyze through for the week.
The top blue straight line is the weekly pivot point (Pp), with the dark green the daily pivot point (Pp). The Dow opened on Monday at the weekly Pp and above the 200 period EMA (the red line). The overall market sentiment is however still bearish since the EMA is still in proper bearish position with the 200 period EMA is above the 60 period EMA (the blue line). One hour after the opening the price started coming down, crossing the Weekly Pp and the 200 period EMA. By lunch time it went below the daily Pp, rebounded and closed at this Pp level. The early morning upward shifting clearly is a bull trap that sucks the short- sellers and drew some buyers and than it reversed sharply on them.

Tuesday opened below daily Pp and almost pushed down to Support (S2 Pp), only to have it recovered that took the price to the confluence of 60 period EMA resistance after lunch. The Dow reversed southward with a close at S1 Pp. The second bull trap of the week.

The stock market by Wednesday showed a downward trend upon worse than anticipated data of jobless claim (a rise in the claim figures since December 1982) announced at 8.30 ET, until it hit a technical support on Thursday at S2 Pp. The price than reversed direction upward,pierced through the 20 period EMA, 60 period EMA and the 200 period EMA and close at Resistance (R2 Pp) level.

Friday, the focus was the US economic news at 8.30 am with the Advance retail sales index fell by the most since record keeping began in 1992 at a rate of 2.8% in October, which also marked the 4th straight month of decline, and the record low of consumer confidence. The market opened gap down, crossed the 200 period EMA and by the lunch time and find support at 60 period EMA.

After lunch, the market reversed upward and took out the 200 period EMA and stop at resistance level of the last swing high with a bearish formation of an evening doji star formed one hour before market closed. At this level the market is overbought as indicated by the RSI value of above 70.

Market than take-away all the gains it had after the lunch run-up and closed at the level of the day’s low.

Notice that, a short-term double top has formed.

Dow 15 min chart

Overall, the Thursday low did not take-out the October 10th low but judging on the volume the Dow at 8,000 point level indicated a good support. Every times Dow goes to that level, there is a heavy volume that signify support or buying opportunity as if that 8,000 level is a mental buy point. How long this level could be sustained…let the market decide….to forecast especially at current low confidence level in global financial environment is a high risk gambit. Trade small if needed with preservation of our capital as best as we can.

Let us see what the market sentiment reflected on the major currencies

EURJPY 30 min chart

EURUSD 30 min Chart

USDJPY 30 Min Chart

On Monday, the three currencies cross, THE EURUSD, USDJPY, EURJOY mimicked the DOW during the US session while during the Asian and European sessions it moved sideway around the weekly and daily Pivot Point (Pp).

By Tuesday, all there currencies cross indicated a bearish sentiment as the 60 period EMA cross 200 period EMA from above. The USDJPY glided sideway until closing, with the EURUSD and EURJPY, fall heavily after the opening of US stock market at 9.30 ET. A weaker Euro could be attributed to weak euro zone economic sentiment. At 17.30 GMT(10.30 ET) the two currencies cross almost went ranging sideway up to the closing below S1 Pp.

Wednesday, the Dow which closed lower the previous day dictated a lower opening of the three currencies cross. After half an hour open for the Asian session, the currencies cross reverse direction, a technical bear correction.
EURUSD and EURJPY with a bullish divergence of RSI and a hammer candlestick carried the prices over to the daily Pp and the negative sloping 60 period EMA. The USDJPY due to previous day strength managed to correct above the daily Pp and touched the 200 period EMA. All the three crosses moved downward at the beginning of the European session. An anticipated lower US stock market provides the impetus for the USDJPY and EURJPY to fall heavily in the morning US session. USDJPY performed badly among the three crosses. The EURUSD fall meekly and contained within the S1 Pp.. The Euro zone and the US dollar weakness against the yen could be an anticipation of a weak economic data that are to be announced the next day.

Thursday, as anticipated, an oversold position in USDJPY and EURJPY which showed a bullish divergence in RSI and opening well below the daily Pp pushed prices to the 60 period EMA. The strength of the moved lasted until the US session.
The EURUSD which went sideway within a narrow channel, break the channel lower support line during the European session to penetrate the S1 Pp, reversed at London open with a formation of candlestick morning star to recover back into the daily Pp. The early morning European session registered a slight fall in EURUSD and EURJPY after the German announced a lower than forecast GDP.

An announcement of continuing jobless claims in US than anticipated trigger a reversal in the three currencies crosses as the Dow crept downward. By lunch time in New York, the Dow made a complete reversal and the three currency crosses trailed the Dow up to the close. The EURUSD showed an impressive moved upward to touch the weekly Pp.

By Friday the grossly overbought currencies as anticipated corrected downwards. Right from the open. through the Asian session, European session and the American session. At around the 8.30 ET announcements of worst retail sales, the currencies inched upward but with the DOW open at 9.30 ET and moved south, the currencies crosses followed suit. By noon the Dow and three currencies crosses decide to reversed themselves upward before reversing downward again one hour before the Dow closed.

Before the close, the EURUSD reversed downward sharply and carried it to close at the lowest for the day. The weakness in euro zone also pulled the EURJPN cross.

For weeks, the market had been discussing how risk appetite, or the lack of it, has been the driving action of currencies against the dollar with the exception of the yen. The strength of the dollar has been amusing given the dismal status of US economy, but since the dollar has managed to hold on its status as “safe haven” asset, fundamental take a back seat. Since risk trends is the lead, it is best to watch the stock market’s reaction as pessimistic turn sentiment could lead equity lower and thus lead US dollar higher given their negative correlation.

The yen another “safe haven” currency with a low yield has been choppily lately. The yen is sensitive to fear and greed in the currency market that leads to breakout and revived trends therefore could make yen as the barometer of the market. One of the key tools to gauge the consistency of the trend in yen is the US stock market, i.e. the inverse correlation between the Dow and the yen.

Looking for a bottom!

Without a doubt to consistently and correctly forecast the direction of financial markets either stocks, futures or currencies is a hazardous task. Therefore, rather than building our own bullish or bearish bias, we should continue to gather the facts, conduct research, and form an opinion while conceding we could be wrong. Be patient and observant and have an educated and open mind to what has happened and what is happening rather than emphasizing on forecasting. What we know and can do is process the information we have now with an understanding that the information will change in the future.

The simplest and popular analysis to discern between a bull and bear market is using simple moving averages. Look at the 5 years chart of KLCI below.

From 2004 to January 2008 bull run, the slope of 200 day EMA (the black line) is never negative, the 50 days EMA(the purple line) is above 200 days EMA vast majority of time.

The crossing from above of 200 days EMA by 50 days EMA in mid March signal the trend change from bull to bear. From that golden cross, the slope of 200 days EMA is never positive and 50 days EMA is always below 200 days EMA which denotes that the bear has taken over.

During the bull run, the market has crossed the 50 days EMA in a few occurrence indicating a correction but rebounded on the 200 days EMA with the exception in March 2008 where the golden cross occurred (the crossing of 200 EMA by 50 EMA).

Presently, we remain in a bear market, which means principal preservation is the primary objective. However, the recent declines in stocks have dropped valuations to levels where buyers will be more inclined to step forward. At some point, stocks will begin to transition from a bear market back to a bull market. It could occur relatively soon or may not happen for an extended period of time. Regardless of when the shift occurs, it is prudent to prepare for the transition.

On my previous post, I indicated there is a bearish head and shoulder pattern forming in late 2007 and early 2008 with a target support low of 830. In the previous post I also did mentioned that the Fibonacci retracement of 61.8% is at about 750 level.

Look at the 3 months chart of KLCI above with the 200 days EMA in black, 50 Days EMA in purple while the 20 days SMA is in red.

The index or market fall sharply with a gap to a lowest point at 801 on October 28th in line with around the globe market heavy slide downward. The market rebound or maybe corrected itself to 926 level on November 5th. At this level the index closed above the 20 days SMA indicating a minor rally but the subsequent two days before end of the week it fall and moved below the 20 days SMA.

Is the bear market going to be over i.e touch bottom?
The market first have to cross the 50 days EMA but please be reminded that past history shows how bear markets have trouble staying above the 50-day and 200 day moving averages. This what is term as false rallies.

It is important to keep our mind in perspective for all possible outcomes, even outcomes which are contrary to your view of the world. During a bull market, it is dangerous to become blindly bullish, especially after spectacular gains. Likewise, during a bear market, it is dangerous to become blindly bearish, especially after significant declines. . While the current bear market could continue for years, it could also be closer to its end than many are willing to even remotely concede. An open mind is an investor's best friend.

Charts are a good way to keep tabs on the human emotions of greed and fear. Often we made mistakes during the bear market by remaining fearful for too long as assets became attractively priced. We rather moved our money tucked safely in the bank (although currently it might not be a safe bet) than considering starting some cautious buying. People want to buy at the top and sit on their hands at market bottoms. It has always been that way and it will always be that way. Bottoms do not occur when conditions are perfect and it feels comfortable to invest.

The Modern Finance

THE Fall Season of 2008 marks the end of an era in American and European banking environment. For so many years, their respective government have been stood at the sideline from the finance business, but now have  been forced to step in to rescue banking systems and the markets. In America, the bulwark of free enterprise, and in Britain, the pioneer of privatisation, financial firms have had to accept rescue and part-ownership by the state. 

The changing scenarios of the finance or banking world has evolved for the past decades. Expansion and diversification of finance/banking players and products has change the finace landscape from the conventional finance to the new finance or modern finance. Technological advancements have changed the face of the world of finance. It is today more a world of transactions than a world of relations. Most relations have been transactionalised. Modern finance its widest sense implies every such process which converts a financial relation into a transaction. 

The financial derivatives that is already hard to grasp for a layman such as option, future contracts, interest rate and currency swaps has become more complex such as credit-default swap (CDS).

Securitization which began with a stright forward of bundling loans into packages that are then sold to outside investors, with the first big market was for American mortgages. These asset-backed securities became ever more complex. Securitisation eventually gave rise to collateralised debt obligations (CDO), sophisticated instruments that bundled together packages of different bonds and then sliced them into tranches according to investors’ appetite for risk. Securitisation opened a new route to growth for banks. They will no longer dependent on the slow, costly business of attracting retail deposits. Securitisation allowed them to borrow in the markets. In 2007 Northern Rock, a British mortgage lender, was the first spectacular casualty of this false assumption; many more banks have been caught out in 2008.

The end results of modern finance saw the dismantling of the fundamental finance with plenty of cautionary lessons to be drawn -- recklessness, greed, ridiculous lending standards, the disappearance of risk management ...and so on.

Do we in Malaysia have been aware of the modern or structure finance products.

I have been out of finance industry since the Asian Monetary crisis of 1997, but I am aware that some of the dervatives products such as option, futures and swaps are being offered but public participation is at minimal level. 

Malaysia’s securitization product originated in 1986 when the Government set up a mortgage financing body called National Mortgage Corp  (Cagmas Bhd) formed on the model of Fannie Mae and Freddie Mac of USA. As Cagamas bond expanded and with  have full recourse to the originators of the loans, the market has not reached a maturity stage where it can stand on the rating of the underlying portfolios unlike the USA counterpart.

The introduction of new securitization instruments (such as asset-backed securities-ABS), and improvements to the regulatory structure such as the 2004 Bank Negara Malaysia’s revised guidelines on the Offering of Asset-Backed Securities and the 2006 issuance of  additional guidelines for bond pricing agencies and electronic booking systems and the 2007, revised its Guidelines on the Offering of Structured Products contributed to a vibrant market. Fortunately our securitization plays is mainly Islamic finance centric. For example, the first Islamic sovereign securitization in Malaysia was issued in February 2005 by Pasir Gudang Local Authority as a mudharabah sukuk and  Time Engineering Bhd  issuing the first ABS using the Musyarakah - or joint venture – concept in the world.

Furthermore, the  banks mainly had the upper hand over the  “classical”  real estate and as for the other types of securitizable credits (mostly ABS) is still low and these products moreover ran a lower risk than their American counterparts and were traded mainly in the domestic market.

A different securitization structure and that has a significant progress in Malaysia is real estate securitization. Its principle, identical to that of securitization, consists in splitting the real estate portfolios into small parts (securities), to make investment accessible to any type of operator and make transactions easy. The most successful formula is the Real Estate Investment Trusts (REIT), which buys and manages buildings by raising capital at the Stock Exchange. The REITS securities issued by these companies are affordable by any individual.

Not surprisingly the initial REIT funds were raised in the United States, before pursuing their progression in Europe in the 1980s. They penetrated Asia under cover of the 1997 crisis. 

The significant progress of the REITs in Malaysia until 2007 are attributable to the low levels of interest rates and the  growth potential of  Bursa Malaysia where the REITs are listed. Apart from their advantage as alternative investment product, the REITs accounted for a new financial source for property developers, which can henceforth finance a major part of their real estate projects by raising funds at the Stock Exchange.

Will the subprime and credit crisis result in at least an iota of realization on the dangers of securitization in Malaysia ? It is not sure that all the lessons will be taken from the American debacle. Financial players historically have a short memory, for example the Asian Monetary crisis is only a decade old but the same situation is recreated in Eastern Europe and Iceland.

Investment banks with a commercial bank based such as CIMB, Arab-Malaysian and Maybank are currently the major player in the securitization market. Competition and demand might bring in the incompetent non-commercial bank based investment banks into play. Just to get a hint how incompetent those non bank based investment bank is, we peek into their commentaries on current market development. For example, one such investment bank appear amateurish in dishing commentaries on three issues last months;(1) HSBC Holdings plc's willingness to pay a high premium for an Indonesian bank,Bank Ekonomi to justify that Malayan Banking Bhd's  Bank Internasional Indonesia (BII) deal is too pricey, (2) The current fall market fall and to sell on the rebound (the dead cat bounce) and (3) The recovery of current malaise in US stock market   depend on the rebound of property market. This as though the current world market downturn is mainly due to the US property market. This is similar to the simplistic reasoning by the Limp of the impending economic  downturn and uninspiring economic stimulus dished out yesterday. Worst still, he is still in denial stupor.

Ouch..October

Traditionally, the month October has been bad for stocks. But not only U.S. stocks that could not only detach themselves with past records., emerging markets, currencies, commodities and bonds all made their way into the history books for having turned in mostly negative performances with past records.

1. The Dow Jones Industrial Averages has a 14% drop over the past four weeks is the biggest
October decline since 1987, when the Black Monday crash sent the blue-chip benchmark
down 23% for the month. It had the most down days in a month since August 1973. During an
eight-day losing streak at the beginning of the month, it racked up a total drop of 2,396
points. In October, the Dow kaput is the 15th worst monthly decline since 1900.

2. The S&P 500 has not had such a volatile month since November 1929, as measured by moves
of at least 1% higher or lower. The Dow posted its two biggest point gains on record, climbing
by 936 points on Oct. 13 and by 889 on Oct. 28. But it also posted its second-biggest point
drop on record, of 733 points. By end of the month S&P 500 recorded the 8th worst one-
month decline since 1930 with 16.9% fall.

3. Shares of Germany's Volkswagen set a new standard for huge price moves among non-penny
stocks. The automaker's shares surged 348% on Monday (27th) and Tuesday(28th), to 945
euros ($1,233), giving it a brief run as the largest company in the world by market
capitalization, after hedge funds scrambled to cover their short investments. By the end of the
week, the stock had given back nearly half of those gains.

4. Crude-oil futures closed by end of October with the biggest monthly loss ever in New York.
Crude's front-month contract drop of 32.6%, or $32.83, for the month -- the biggest monthly
decline recorded on Nymex since trading began in 1983. Crude is now more than 54% lower
than its record high of $147.27 hit in July. Year to date, it's lost 29.4%.

5. Gold futures ending October's trading with their worst monthly record since early 1983, as a
strengthening U.S. dollar and fund liquidations pounded the precious metal and other
commodities. Gold for December delivery closed down $20.30 at $718.20 an ounce on the
Comex division of the New York Mercantile Exchange. The metal lost 18% in October, its
biggest percentage loss since February 1983, according to Comex data. Gold is now 28% lower
than its high above $1,000 an ounce hit in March.

6. In other metals, December copper fell 3.3% to $1.8290 a pound, extending its monthly loss to
35%. December silver slid 0.6% to $9.73 an ounce. Silver surrendered 20% this month.
With the fall on commodities and the stock market, the dollar gets a lot of credit. The 7.8%
jumped of the index is the 4th best one-month improvement since 1967. The greenback
gained an astonishing 14.3% against the euro from the close of September to the dollar's peak
a few days ago. Those healthy gains, however, pale next to its advances of 22.3% against the
Canadian dollar and 31.8% against the Australian dollar.

7. The Japanese Yen, another safe-have currency recorded a 16% rise against the the Euro and
7% against the dollar for the month of October.

8. All around the globe stock market went bunkum , with MSCI Word Index loss 19.1% in
October i.e. the largest monthly decline since the Index started in 1969, beating October
1987’s -17.1%). MSCI Emerging Markets Index fall 27.1% , the worst monthly loss since
Russia’s debt default in August 1998.

9. The fall in; London’s FTSE -10.7% while the German’s DAX -14.5%.. In Asia, China’s
Shanghai Composite fall by 24.6%, India’s Sensex -23.9%. The Australian’s all Ordinaries -
14%, Singapore’s STI -23.9%, Hong Kong’s Hang Seng -22.5%, Korean’s KOSPI -23.1% and
Tokyo’s Nikkei -23.8%. Our local Bursar comparatively performance better with the Composite
Index fall by only 15.2%.

10. The ringgit performance against other currencies is as per charts below.

Against our major trading partners, the Ringgit appreciated vis-a-vis the Euros and Pounds. The Yen appreciated more markedly versus our Ringgit as compared to the US dollar or the Chinese Renminbi in October. However by late October the ringgit strengthened against the the Yen.













As against the Asian currencies, the Aussie Dollar and the Rupiah fluctuated widely against our Ringgit. The two currencies with the Korean Won suffered badly during the American and European credit crisis.