Market Outlook as at October 29, 2015

FBMKLCI has once again dropped below the neckline of the head and shoulders top at 1680. On October 7, we had noted that the index managed to climb back above the neckline (for the chart, go here). That earlier recovery (above the neckline) meant that the prior interpretation of a market that had made a top was in doubt. However, with the index once again trading below the neckline, the interpretation that the market has made a top reassert itself.

Chart 1: FBMKLCI's weekly chart as at October 29, 2015_9.50am (Source: ShareInvestor.com)

For long-term charts on FBMKLCI & FBMEmas, look at Chart 2 & 3.

Chart 2: FBMKLCI's monthly chart as at October 29, 2015_9.50am (Source: ShareInvestor.com)

Chart 3: FBMEmas's monthly chart as at October 29, 2015_9.50am (Source: ShareInvestor.com)

If the two indices do not recover above their respective neckline in the next 1-2 day(s), the negative interpretation would return, i.e. the market has made a top and will likely to continue to drift lower in the weeks and months ahead. Thus, it is important that we watch the market closely and take the necessary corrective action to adjust for the latest market outlook.

Source: http://nexttrade.blogspot.my/2015/10/market-outlook-as-at-october-29-2015.html

Staying away for now

Despite the good rebound in the market the past 2 days and despite what people are saying positively on the economy, I am staying away for now.

Too much volatility and bad surprises for a simple minded investor like me.

Plus a few articles I've read like ..

What Are So Many People Freaking Out About A Stock Market Crash In the Fall of 2015?

If History is Any Indication, Junk Bonds and Copper are Telling Us Exactly Where Stocks are Heading Next

You get the picture.

Recall in 1998, oil prices dropped to the lowest since 1970s, RM crashed, stock market collapse, the PM of the day was at high risk of being ousted.

The same things are happening in 2015, call it ...

So unless all these factors are resolved, I expect an overall bad stock market to prevail for now.

How to Catch a Falling Knife

Buying when a stock is plummeting takes guts, but it can be exceptionally profitable when it works out.

Just look at the opportunities in the last year. Fairfax Financial (NYSE: FFH ) , Career Education (Nasdaq: CECO ) , and Champion Enterprises (NYSE: CHB ) all hit multiyear lows last summer. With Fairfax, people were worried about the insurer's exposure to hurricanes. With Career Education, the entire for-profit education industry was in the dumps amid a stream of scandals and increased competition. With Champion, investors panicked over the state of the manufactured housing market. Since then, these stocks are up an average of 90%.

The long-term returns can be even better. If you bought Royal Caribbean Cruises (NYSE:RCL ) after its sharp post-9/11 drop (when the outlook for travel looked bleak), you'd have a more than 300% gain. Elan actually provided two opportunities in the last five years, dropping from $40 to $2 over a few months in 2002, then from $27 to $3 in early 2005.

So, there's money to be made from catching falling knives. The challenge is doing it without losing a finger.

1. Accuracy over quickness

The first rule of catching falling knives is that accuracy is more important than quickness. Stocks fall because of bad news. That bad news will typically take some time to absorb, so you usually have time to evaluate the investment. And this is one time you shouldn't rush -- it's important to understand how the news will have an impact on the outlook of the company.

Is it just a one-time event that nobody will remember in a year, or does it affect the business more substantially? Is the company's competitive position affected? Or, even worse, is its liquidity? You should be looking to catch knives that result in shares being cheap, but don't substantially affect a company's long-term outlook.

An ideal knife to catch would have been Merck (NYSE: MRK ) below $30 back in October 2005 at the peak of the Vioxx uproar. Merck's competitive advantage was in its ability to create, acquire, and commercialize drugs, and this advantage was unlikely to be affected by Vioxx. Its balance sheet was solid, with $10 billion in cash. Vioxx was bad, but clearly not a company-killer, and now the stock is above $50.

2. Wear gloves

When you're catching knives, prepare for the worst. Often, a stock will continue falling after you buy it. You should plan for this scenario. One way of doing this is by dividing your money into three piles, and buying in thirds. Buy the first third at a good price. If the stock continues to fall, buy the next third. If it drops once more -- and the stock seems more attractive than ever -- buy the final third.

My rule of thumb is to buy a big enough initial position that I'm content if the stock recovers, but a small enough position that I'm even happier if it goes down and I can buy more at a cheaper price.

3. Aim for the handle

The final rule of falling knives is to be certain that the stock is cheap based on your analysis of the company's potential. Even if a stock has fallen by 70%, that doesn't make it a good buy. Historical prices have little to do with whether a stock is fairly valued right now. If a company is 300% overvalued, then even if it falls by 50%, it's still overvalued by 100%. So, before investing, make sure you calculate the company's fair value based on your current outlook, and only buy if the stock is cheap.

The Foolish bottom line

Following these strategies will help you avoid being cut while reaching for these great returns.

Source: http://www.fool.com/investing/value/2007/05/29/how-to-catch-a-falling-knife.aspx

Is this KLCI Index Sell All Signal ? (the canary in the coal mine)

I have noticed that there are times when the KLSE drops so badly that even if you are a value investor, it makes sense to sell everything and wait till the stock market recovers.

The problem is how to detect when the drop is a major fall, or just a twinge in the market. This chart suggests that detecting this is possible:

I have observed that when the KLSE drops below the 300-day moving average, this is a SELL ALL signal. For example, if you had bought shares at the peak in 1997 and you held on to them, you can see that the KLSE only recovered to 1997 levels in 2007. It would have been better to sell those shares at a small loss in 1997, then start buying profitably when the KLSE goes above the 300 day moving average at the end of 1998.

You can see the same technique also works for the 2000 Internet Bubble fall, the 2003 Invasion of Iraq, the 2008 subprime crisis, and 2011 Greece Euro crisis.

The only time this technique is iffy is after the 9-11 terrorist attack, when the KLSE was rising above the line, then suddenly plummeted when the planes struck New York. However if you had held on till 2002, you would probably have made a profit. 9-11 is a real black swan event, as there was no prior warning signs, unlike the other major falls.

You can also consider buying on the upswing before KLSE goes over the 300 day moving average. However you need to be really confident. As you can see in the 1997 fall there was a false bottom in late 1997, and the KLSE plunged even further, reaching the real bottom in August 1998.

I have also tested this with the S&P 500 and Hang Seng Index, and confirmed it works for all of these stock market indices.


Note: 300-day moving average can be plotted using Yahoo Finance chart.

Source of this article: http://juristech.net/juristech/detecting-major-drop-stock-market/

Stock Market 4444

The local stock market has put a happy smile on many people’s faces since the last big drop back in 2008. But now, if you go online to any stock market website or see CNBC today, you will hear some influential people seriously talking about a big stock market correction - 4444 (Die) ! What is a stock market correction and how do you survive a stock market correction? Read on for all these answers and more.

What Is A Stock Market Correction?

A stock market correction is when the stock market main index (in this case the KLCI Index) drops by 10 to 20%. Throughout our short market history, stock market corrections happen fairly often. It is something to expect which relate to the stock market investing cycle.

What usually happen is some influential people or funds decided that the profits were too good to refuse and took money off the table. Some research reports that stock market corrections are to be expected every 2-3 years on average.

The most recent stock market correction was back in 2013, during the few months leading to GE13. If you remember that occasion, the stock market was very volatile. One day it was up a couple of points, then it was down 30+ points the next day. It was a crazy time.

How To Survive A Stock Market Correction

If you agree with me that corrections are part and parcel of the stock market investing cycle and happen fairly often, the next step is to be prepared for it when it does come around. Here are a handful of tips to survive a correction and come out from it with most of the eggs intact.

Always Take Profits From The Stock Market

This is the most sensible thing to do in the stock market, period. When the price of your shares hit the profit target, sell and get out from the stock.

Buy and hold is good if the stock have not move. But if the stock move a lot in a short period of time, it is probably time to take some profits as it could be priced way above the intrinsic value.

Cash Is Always King

As the stock market goes higher and higher, it is probably a good time to take profits on your stocks and go into more cash. Be smart and keep the cash intact. Don’t go chase after another stock using the available cash you have in hand.

Sometimes it is better to sit tight and do nothing. Wait until you see a real stock market correction before using the cash you stashed away for a rainy day.

Keep An “Opportunity Fund”

If you like to explore this “cash is always king” idea further, why don’t you keep some money in an “Opportunity Fund” – this is a cash account that you funnel money into over time, allowing you to take advantage of opportunities when they present themselves to you.

If the market drops by 10%, you could take some of this money and put it in the market. There are many uses for an opportunity fund, so having one for a rainy day such as this is a good idea.

Don’t Put Everything In The Market

People tend to put more money into investments that they are getting good returns over time. This happens fairly often in the stock market, especially during an extended bull run such as what we are experiencing today. In the end, they have everything they own in the stock market. And, this could be a fatal mistake.

In fact, as the stock market goes higher, it is a wise move to slowly reduce your expose to the market until things look cheaper. To survive a stock market correction, you need to keep a good balance between what you have in the stock market with your other investments so that you can come out from it with most of your eggs intact.

Drawing Up A Survival Plan

Everything starts with a plan. If you do not have a plan to prepare for a stock market correction, how are you going to be ready when it comes. But, with a plan in your hands, you will know why you are doing what you are doing and will be able to better survive a stock market correction.

Conclusion

Are we due for a stock market correction? Maybe but the fact is the stock market bull is ageing. Will one happen, for sure, but when no one knows. As a result, your best option is to get ready and be prepared when it comes. This is how you be a successful investor in the stock market. Period.