Was Friday the bottom for KLCI?

We know it is practically impossible to pick market bottoms before they appear. Those who claimed they do it all the time are likely to be liars. However, almost everyone can identify market bottoms after they appear on the charts - but usually, they are not much use since prices would already recovered quite far. And in between, we have a situation like yesterday where KLCI touched 1141 just before 3 PM, and then, recovered strongly by 50 pts to close at 1191. So, a question may be "was yesterday a bottom?"

Firstly, let me say I don't have a crystal ball - so, I don't know for sure. However, I would like to share with you some interesting observations, and my own practice. You can then form your own opinion accordingly.

1. KLCI technical candlesticks observations

- After Friday closing, many indices regionally formed a "hammer" (small body, lower shadow at least twice the length of body or longer) after a prolonged downtrend.

- The prior days (e.g. Thursday and prior), the force of the downtrend was stronger (longer body), indicating panic selling. Prior days panic selling combined with a hammer is suggestive that the downward pressure is losing force significantly.

- On Friday, KLCI temporarily pierced through the 23.6% Fibonacci retracement support level of 1161 temporarily, but staged an amazing recovery of nearly 50 pts to close above it. This is also suggestive of a technical rebound.

- Relatively high volume on the hammer day, suggesting Friday could be a critical day.

- But KLCI is still below 260 day EMA and 38.2% Fibonacci retracement, both of which are around 1205. Not a confirmed bullish signal yet.

- So, what do you think?

- Me? Based on this point alone, my guess is say 50/50, i.e. 50% chance we might be seeing a "local bottom", 50% chance not yet. Odds improves slightly (say 55%-60%) if KLCI closes well above 1205-1241 (38.2% and 50% Fib retracement support) convincingly next week. Odds also improve slightly with other observations below.

2. US Financial Stocks Positive Divergence?

- Divergence is a very important concept in Technical Analysis. The opposite concept is convergence. Normally, when a bad news is announced, we expect to see the stock price to fall. However, when the stock price rises instead, it is often worth a closer look.

- I first noticed a positive divergence Friday morning, when Countrywide in the US announced a sub-prime related problem the prior night. I mentioned this in the cbox at 11.29 AM yesterday (see below).

- Now, technically, Countrywide did not show a divergence - the stock price took a significant fall, around 11% after the sub-prime bad news announcement. However, related sub-prime stocks - namely Bear Stearns and Goldman Sachs stock price actually rose! So, this is not strictly divergence.

- But I find Bear Stearns stock price behaviour particularly interesting. Despite the continued poor sub-prime news (for Countrywide), its stock price rose 13%! See the circle in chart below. (Actually, the green candle on Thursday night took out last 5 day falls, not 3 days as I mentioned to Goldman).

- But some qualifications: First, a single financial stock doesn't mean entire sector moved. Second, a "bullish reversal" doesn't necessarily mean subsequent rising prices - it could also mean further sideways movement and volatility. Third, the high on Thursday is lower than the week before, although last Friday high is marginally higher, so, touch and go whether we'll see better / worse results soon.

- So, what do you think of this? Is this a significant observation to predict possible local bottom?

- My guess: when combining 1. and 2. above, the odds have improved slightly - say 55% yes, 45% no.

3. The Fundamental's case becomes compelling

- At 3.06 PM yesterday, "grabber" (a regular investssmart chatter) voiced out something which I have been privately thinking all morning on Friday, that maybe the KLCI has fallen a bit too much from a fundamental perspective. See 15:06 entry below, where grabber raised the ANALABS example, but this could have been another fundamental stock:

- My public cbox reply was cautious (I don't want to be blamed again). But for my own personal account, I had already entered buy orders prior to grabber's comment at 3.06PM.

- For ANALABS, the fundamental case looks compelling. At 3 PM, Mr Market was valuing it at only $43m. The stock has $35m in cash, with liquid securities valued at $5m, or a total of $40m, suggesting the profitable business is valued at a paltry $3m. Last year's earnings alone is already $8.4m, i.e Mr Market is valuing ANALABS business at a P/E of well below 1x!!

- You could make similar cases to other fundamental stocks (or at least, the one I was eyeing). In my mind, it was clear Mr Market was behaving more irrationally on Friday, especially just after lunch time.

- My guess: Combining 1., 2., and 3., I think the odds of seeing a local bottom gets better slightly.

4. Yes, my Buy Orders for Friday was executed
It has been quite a while since I had executed orders like last Friday, but see below.

A few points:

- No stock tips and no personal details. But these stocks are real - I only show the first letter of the stock name.

- Yes, Net buy is 17 stocks. Of the 20 stocks bought, 3 were closed before end of day.

- I had originally intended to just "rebalance" my asset allocation on Friday (I was and became more underweighted as a result of the stock price falls the last month). However, the stock price fall after lunch was quite dramatic, and took out ALL my open Buy Orders. I also bought more of others after that. I had some idea, but only properly realized after the trading day that I had bought more than what I had intended. But despite the slight over-trade, I still hold significant cash by many investor's standards.

- To me, all 17 stocks are "Trading Buys", and not "Buy and Hold". I.e. depending on how the market behaves, I could just as quickly close all 17 positions by 9.02 AM, Monday.

- I reserve the right to change this to "Buy and Hold" depending on market conditions. Similarly, I reserve the right to dispose all without informing anyone.

- In short, you buy at your own risk. Me, I intend to be extremely fluid.

- And just in case someone says that I didn't tried calling it for others, here's a snapshot of the cbox at 3.12 PM, and a reminder at 3.19 PM.

- Ok, it turns out I over-traded more than 10% capital last Friday, but not significantly more that would cause me to lose sleep over it.

5. US markets closed strongly on Friday night

- Dow +1.8%, S&P500 +2.5%. The S&P chart shows a better picture:

- You can clearly see the hammer on Thursday. Friday long green candle is a bullish continuation candle, suggesting more upside. Ideally, I like to see the S&P500 close above the 200 day EMA, and cross and stay above the downtrend line at around 1475-1480. If S&P500 closes above this figure convincingly early next week, then, the odds that we've seen a local bottom on Friday for the KLCI gets better.

- As the odds of S&P500 showing a bottom gets better, I expect the odds of KLCI to show a "local bottom" to be roughly aligned.

6. Asset allocation and market timing may turn out to be more critical than stock selection during this correction

- This is not related to the question, but has practical implications on investor's actions.

- Don't get me wrong - stock selection is always important, but the most common investing errors I saw during this correction is the tendency to be fully invested (or be on margin) when KLCI was at 1392.

- It should be clear to all, that had one carefully watched one's asset allocation at market highs and prudently held cash, one would not be completely killed from the current correction. There is a loss, but not so severe.

- Also, once the market starts to correct, it is important to get the timing right before rebalancing. The temptation is very strong to rebalance at anytime over the last fortnight, but that would have been a mistake.

- I emphasized all this repeatedly in the cbox in the last 2 weeks. An example from Friday is below:

- Risk tolerance (the ability to not let temporary unrealized loss to cause you to panic or not sleep soundly) is also another important topic, but that would be outside the scope of this article. My hope is that the current correction and high volality will lead you to become better investors in future. I have certainly learned a lot from the chatboxes and the writings of others.

7. If you haven't bought yet, should you buy next Monday?

- To be honest, I can't answer that question for you. The main purpose of this article is to share with you my observations, and what I actually did last Friday. You have to make your own decisions.

- Another view is that I have been waiting since last month to rebalance, and last Friday gave me that opportunity to rebalance - it turns out I rebalanced more than I needed. So, it is highly doubtful that I will personally buy more next week. So, I don't feel qualified to advice you here. Sorry.

8. Conclusion

- From my own personal perspective, naturally after having bought on Friday, I am glad and slightly relieved to see US markets closed strongly on Friday night.

- If KLSE and Asia regional markets stays true to form, then, we can expect the Asia to follow suit next Monday morning. So, if there is strong divergence, then, I would not hesitate to cash out completely what I had bought on Friday.

- On balance, I think the odds may be better than 50/50 (say 60/40), that we've seen a "local bottom" on Friday. To avoid ambiguity, I define a "local bottom" as KLCI not making a lower bottom than 1141 within next week. Remember, this are just odds, i.e. I could be proven wrong quite easily. And note, my definition only refers to a very short period.

- Based on all these observations, I have bought on Friday, originally intending to just rebalance, but turned out to have over-bought due to the large unexpected market correction. (i.e. lucky).

- But all are trading buys. Why? Because the high volatility is still there. I intend to monitor the markets carefully to make exit decisions if necessary. But I reserve the right to change this to "Buy and Hold" later without informing anyone, depending on how the market behaves.

- Do remember that you make your own decisions based on the observations I have shared with you, and you always buy at your own risk.

- Please feel free to comment if you agree or disagree. Contrary opinions are welcomed. Do feel free to share your own observations if I've missed them.

- Best wishes during these turbulent times.

Disclaimer: Always use your own judgement, and invest (buy, hold, sell) at your own risk.