Swine Flu - What is its impact on KLCI

Before we talk about the impact of Swine Flu, let us look at the impact of Sars on Hong Kong stock market in 2003. Sars started in Foshan Guandong of China in November 2002, by August 2003 when the crisis ended, it had spread to 29 countries with a cumulative total of 8422 cases and 916 death. Hong Kong had the most direct hit by the crisis.

When Sars was first reported in November 2002, Hong Kong stock market was almost at the end of the bear market caused by the Dot-com Bubble in year 2000 as shown in the above chart. From July 2000 peak of 17,920 Hang Seng dropped by 45% to 9,722 by November 2002. From November 2002 when Sars started until 29 April 2003 when WHO annoumced that the worst of the Sars outbreak appeared to be over in Singapore, Hong Kong and Vietnam, Hang Seng Index has dropped another 13% to 8409 and then started to rebound. From April 2003 to August 2003 when the crisis was over, Hang Seng had gained 29%. During the Sars outbreak period Hang Seng dropped 13%. During the same period Singapore STI dropped a similar 13%. KLCI dropped only 3%. For Hang Seng, whether the 13% drop was caused mainly by the Sars or whether part of the 13% was due to the Dot-com bubble, it is hard to assess. From the chart pattern I am more inclined to believe that Sars was used as a reason for a final climax sell down before the starting of a new bull phase.

What I have observed in the past is, during a major bull or bear run, we need "reasons" or "events" to trigger a market correction. All the major world bourses until last Friday were at over-bought position (refer to my previous posts) as indicated by all the technical indicators. Similarly KLCI as shown by all the indicators has been at an overbought position since the second week of April as shown below.



Market has been looking for a reason to correct itself and swine flu provided a good reason to sell in the last two days. I expect the correction to continue until the corrective wave is completed and all technical indicators have moved lower to where they should be. At this moment the magnitude of the corrective wave is the main concern.

From the above chart of KLCI, since the bottom in December 2009, KLCI has completed wave 1 and 2. From 838 point at 2, KLCI ran all the way to 992 points before the Monday and Tuesday pullback. The 5 waves from 838 to 992 can either be (a) sub-wave i of wave 3 or (b) 992 is the end of wave 3 as the magnitude of 3 is about 1.618 times of wave 1. For case (a) the correction will continue for another 4 to 5 days. But if it is case (b) then I will expect an a-b-c-d-e wave 4 that fluctuates within 50 points range since wave 2 is a simple a-b-c. Case (b) will take easily 3 to 4 months to complete. Whether it is case (a) or (b), this current drop, in my opinion is the last chance for those who have missed the boat so far to participate in the current run. Personally I think case (a)'s probability is higher.