Should retail investors buy on New Low?

The KLCI fell roughly 50% from its 2008 high of 1524.69 points, and coupled with some share splits, many stocks has broken its new low, and this seems very attractive to many investors. There is a saying "things are cheap for reason." and for stocks to trade at its new low, there must be some reasons and risks, and let us take a deeper look at the psychological aspect of new low; especially when the KLCI (many blue chip counters) are trading at such attractive level, it is a good time to select some good counters for ones portfolio, but the selection has to be done extremely carefully.

"Buy low, sell high" is a common sense which almost sounded logic to most investors, but under difference circumstances, it could be a highly risky strategy, especially when stock is breaking new low.

What is new low? By definition, a new low is a level where price break below its recent lowest in a particular time frame. If stock price should break below its all time low, it is called historical new low. Price of a stock will fall because buyers are not willing to pay higher, while sellers sell to buyer without asking for any premiums. If a stock price breaks a new low, it means that there are no buyers willing to pay even the recently lowest price, and the sellers are selling to buyer even at a price lower than the recent low. This shows that the selling pressure is stronger than the buying interest at that particular moment.

In addition, when a stock is trading at a new low, it means that all share holders who has their positions earlier are now losing money. Try imagine, under what circumstances would a seller sells his position at a loss? He or she must be desperate and fearful, and he or she is cutting loss, or his or her positions are being force-sold.

When stock is trending down, the characteristic is that each rebound hits a resistance lower than the previous resistance, and breaking new low. As indicated by Chart 1, a1, b1, c1, and d1 are the lower resistances which we called "Lower-highs".

Indication	Description
A	Price rebounded at RM 14.60, and RM 14.60 was the support.
B	Price broke below RM 14.60 (New Low), suggesting all share holders with positions above RM14.60 were losers.
C	Price rebounded slightly at RM12.60.
a1	Although price rebounded, it was resisted at the RM 14.60 and started falling again there-after.
D	Price broke below RM 12.60 (New Low), suggesting all share holders with positions above RM12.60 were losers.
E	Price consolidated, temporary supported at RM 11.30.
b1	Despite price rebounded, it was resisted at a1 level. (Lower-high)
F	After consolidated for around a month, price broke below RM 11.30 (New Low). Although price has discounted 22.6% (from RM 14.60 to RM 11.30), it was trading at new low, and still, all share holders who bought at RM 11.30 were still losing money.
c1	Price rebounded 11%, but still resisted at b1.
G	Price rebounded at RM 8.55, and RM 8.55 was the temporary support level.
H	Price broke below RM 8.55 (New Low), again, all share holders who had their positions above RM 8.55 started losing money.
d1	Although price rebounded and tested RM 8.55 many times, it remained resisted by the RM 8.55 resistance line.

Table 1:

The Subconscious of New Low

From Table 1, we can see that whenever a stock is breaking new low, all share holders are losing money, and despite many attempts and rebounds, each rebound could only hit a high which is lower than the previous resistance (Lower Highs). Therefore, during a downtrend, the confidence of share holders will decrease.

In addition, there is a very important psychological effect in new low, which is a change of objective. Investors take risk to buy a stock for only 1 reason, which is the hope to make money. However, if price should start falling after they had bought their positions, their objective of making money will slowly fade away, while another objective will emerge unconsciously, which is the objective to break even. In short, when stock is trending down and making new lows, many share holders objectives are now changed to breaking even from their original objective to make money, thus they will remember their entry level more than anything else, and their memories of price would be the resistance of the stock price.

As shown on Chart 1, arrow B, D, F, and H are the strongest memory of investors which share holders changed their objective from making money to breaking even, thus a stronger resistance.

Chart 2:

Chart 2 is an example of New low of Lionind [4235] from 29/05/2008 to 29/10/2008, it shows that whenever price broke new low, it has more downside risk.

Important Concept:
In conclusion, when a stock is making new low continuously, it is highly risky to buy at the new low, because no body knows where is the lowest rebound. In other words, there will be many new lows, but only 1 low is the lowest; therefore, chances for an investor to pick the wrong low is higher than picking the right low. In reality, investors should learn the right concept of trading, which is to buy only on the uptrend.

Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/

Understanding Portfolio

The KLCI fell roughly 50% from its high of 1524.69 points to 801.27 points, which is a reaction of chart pattern Head and Shoulder Top, where price broke below its neck line. (refer to Chart 1). Technically speaking, a 50% retacement level is a level for a technical rebound, which is an opportunity for experienced chart readers. In fact, the KLCI rebounded nearly 100 points from its 801.27 support, and this might have created a golden opportunity once every 10 years.



Chart 1: KLCI breaking Head and Shoulders Top, started the 2008 bear run.


There were some investors taking positions at the 800 points rebound, for short to medium term trend, however, there are still some investors who believe that this is not the bottom yet.
Nevertheless, no body really know the exact answer for predicting the market is almost impossible, even the newly elected US President Mr. Obama does not have any answer. But one thing for sure, that is many countries' central banks are aggressively providing funding to aid the worsen situation. These activities are believed to help the market positively, but the effect would not be immediate.
Generally, economic data is 3 to 6 months behind of the stock market. For example, the KLCI started its bear run on the 29/02/2008 (refer to chart 2), as the KLCI broke below the 200-Moving Average, but not every one has noticed the signal. Most people only felt the aftermath after the petrol price hike, which was around August to October last year. By that time, the KLCI has already fallen 570 points. This has once again shown that the stock market is always faster to reflect the economy.



Chart 2: As indicated by A, the KLCI fell below 200-Moving Average, suggesting an end to the bull run. This exact chart has been published in the Business Section of Sin Chew Jit Po.



The current market is filled with negative news such as high unemployment rate, weaker company earnings, but if we were to look at this from a positive point of view, when the market is at its weaker point, it also imply that the recovery is due to happen. If the theory of which the stock market is always ahead of the economic data, then, by the time we see better economic data, the bull market has already begun.

This lead us to a next question. If the stock market were to rebound, how does one pick stock? There are many ways which people believe in when it comes to stock picking, but not every way is suitable for every person. There are about 1000 listed companies trading in Bursa Malaysia, and to really pick the suitable ones and the suitable time is really not an easy task. Generally, investors pick stock by:

1. Recommendation from friends or remisiers.
2. Insider news.
3. Feeling that the price is very low and attractive.
4. Seeing other making money from a particular stock, he or she also wants to get involved with that particular stock.
5. Based on own analysis.
We must understand that a successful and profitable method in selecting stocks varies, and one does not form his or her investing 'style' overnight, it is rather a long, boring, and often requires lots of hard work before anyone could develop their own method. Please take a look at the following table for some different types of investment styles.

Styles or Types:	Characteristic:	Importance:
Conservative	Priority is heavy blue chip counters.	Company results, fundamental issues, and macro economy.
High Yield	Choosing high dividend yield stocks that yield 5% or more.	High dividend yield.
Short-term	Short-term trading, (T3), trading on most active counters.	High liquidity, company announcement and related news.
High Risk	Chasing stocks that rally due to special news, derivatives products, and even penny stocks (stock trading at or below 10 cents)	News, rumors.
Long-term	Strong confidence in particular company's long term prospect, and despite the price fluctuation, they generally will hold on to the shares.	Long term company prospects, consistence good earning.
Bottom Fishing	After bear run and after a period of consolidation, these investors will begin to accumulate their choice of stocks.	Macro economy, stocks with low PER, or stocks below the net assets value.
Comprehensive	Apply Technical analysis with Fundamental analysis, trading for medium to long term if the uptrend persist, or short term trading if trend should end.	Fundamental analysis, and Technical analysis, and follow the major trend.

The above investment styles varies, and emphasize in difference importance of skills, but definitely not every style suits every personality. Therefore, investors must first understand their own temperament, and know which type of investors they are before finding a comfortable investment style for themselves. Even professional fund managers need to lay out their fund objective before they can start selecting stocks for their portfolio. For example, an Index fund focus on index link counters, while a growth fund focus on company that has be higher growth potential with the given economic situation, and Dividend fund focus on high-yield stocks, etc.
To sum up, there is no 'get rich quick' method or easy money formulas. Hard work and extensive studies are inevitable if one wish to succeed in the game of investing.

Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/