Chart 1: Relationship between Individual
Share price and the Big Market
Chart 1 shows the relationship between the broader market and the individual counter's share price.
In the professional game of Stock trading, traders or investors need not only understanding companies' fundamental and technical analysis, but also the relationship between an individual counter's share price and the market mood, as well as the broader regional market performances.
With the right market sentiment, chances for a stock price to rally are much higher. In other words, during a bear market, even the share price of the strongest fundamental counter could drop.
In terms of the broader markets, it is usually means the Dow Jones Industrial Average index of the United States of America, and our Asian Pacific indices like Nikkei 225, as well as the Hang Seng Index. In additional, other factors like political issues would influence the share price of individual counters.
The relationship between the KLCI and the regional markets:
In the era of advanced communication technology, financial markets across the globe are moving closer together than ever. With the exception of major local events like elections, political issues, major corporate events, the KLCI performance is usually in-line with the regional markets. Below are the charts of regional markets for comparison.
After falling for 9 months (losing almost 50%), the KLCI rebounded from 801.27 points on the 28th of October, 2008.
Hong Kong Hang Seng index touched bottom on the 27th of October at 10676 points, and rebounded on the 28th of October, 2008. (Losing 67%)
From the above comparison, we can see that both the Hang Seng index and the Nikkei 225 index rebounded on the 28th of October after falling for quite some time. This shows that the performance of regional markets are closely related.
In addition to the rebound of the 28th of October, 2008, the performance of the above 3 indices are almost identical. After their rebound in October 2008, these indices were moving in trading range, and in March 2009, all 3 of the indices rallied again. Therefore, traders and investors have to study their relationship in order to take advantage of the reversal of trend, other than studying individual counter's fundamental and technical analysis.
Currently, most of the stock markets across the globe are moving higher. Other than the effect of regional market performances, our local fundamental issues are also playing a big role, in which, traders and investors must not ignore. For example, data shows that the outflow of foreign funds in the 4th quarter 2008 is lower than expectation, suggesting foreign investments might be regaining their confident in Malaysian market. If foreign fund should return to Malaysia, it would be a strong support to our market performance.
Another example is the better than expected exports in the month of February. Although the world economy is still weakening, the better than expected exports data in February suggests that the economy might be recovering, which is another positive note to the local stock market. Generally, the stock market react 3 to 6 months earlier than the economic data, and if the economy should recover by the end of 2009, the KLCI is likely to be at its bottom now.
The above positive issues had already reflected on the chart of the KLCI, as the KLCI formed a double bottom after breaking its downtrend line, followed by a formation of a Higher-low, suggesting the KLCI is now moving uptrend. As the KLCI moving in uptrend, individual counters are following the rally. For examples:
1. Genting [3182] - Technical rebound with Higher low.
2. Gamuda [5398] - Continuation of uptrend with Higher low.
3. Resort [4715] - Technical rebound with Higher low.
4. Lionind [4235] - Rounding Bottom with Higher low.
5. Muhibah [5703] - Double Bottom with Higher low.
6. LCL [7177] - Technical rebound with Higher low.
7. MPHB [3859] - Rounding Bottom.
8. Pelikan [5231] - Technical rebound with Higher low.
9. IOI [1961] - Continuation of uptrend with Higher low.
10. Airasia [5099] Beginning of uptrend with Higher low.
Despite the recent rally, the KLCI remained below 200-day Moving Average line. Therefore, there is still a risk for the KLCI breaking below 800 level and resume to its bear run. If the KLCI should break below 800 points, there is a risk for the KLCI to go even lower. (During the 1997 bear run, the KLCI lost 80%).
Nevertheless, with the technical view of the KLCI is slowly improving, coupled with some improvement in fundamental as well as the regional market are also rebounding, investors and traders can take advantage of the current market, but must have a sound trading plan with the use of Trailing Stops.
Conclusion:
Understanding the relationship between the broader markets and individual counter is absolutely important if one wish to succeed in the world of investing or trading. Especially for retail investor, it is very risky to go against the major trend, and most of the time, investors who failed to follow the broad market are caught by the downtrend, and ended up holding a portfolio with huge losses.
Successful investors or trader must learn to pick market leaders while following the broader market performance. Generally, investors could not buy at the lowest price of the leading counters, but that is not important, the important thing is that investors who bough these leaders are applying Trailing Stop method, while taking the advantages of the rally with minimum risk. Successful investors never want to buy cheap stocks at new low.
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Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/
