Thursday, April 30, 2009

Signals From Dow

Dow on Thursday closed with a red candlestick with long upper shadow. It indicates that in the second session bull has lost control of the market to the bear. This is a bearish candlestick but it still need confirmation. If Dow closes lower with a red candlestick on Friday, that will signal the end of the current wave (1) and the starting of corrective wave (2). This long upper shadow candlestick is significant because it appeared right at the end of sub-wave v of 5 of (1).

The overall wave (1) formation is systematic and bullish. First it formed an overlapping wedge "leading diagonal" i-ii-iii-iv-v for sub-wave 1. Then it formed another similar overlapping wedge "leading diagonal" i-ii-iii-iv-v for sub-wave 3 and five overlapping mini waves for sub-wave 5 to complete Wave(1). Right at the end of all these moves is this bearish candlestick. From the above chart one will notice that the higher degree wave 1-2-3-4-5 itself is a "leading diagonal", this is very bullish it implies strong uptrend after the wave (2) correction.

Other signs that indicate that wave (1) is giving way is the divergence between the technical indicators and Dow. No doubt the indicators have been moving side-way while the Dow kept on moving higher, but with a closer look at the indicators, one will notice that their side-way movements are not in a horizontal direction but are in a gradual downward direction opposite to the Dow's gradual upward movement.

The signal is very clear, wave (1) has either ended or about to end (possible 1 or 2 more days of Doji candlesticks formation). It is advisable to take profit.

Next question is on the magnitude and duration of wave(2) correction. According to Elliott's Principle it can either be a shallow in magnitude but long in duration complex wave or a simple a-b-c bigger magnitude but shorter duration correction. Since wave (1) formed a series of "leading diagonal" my guess for wave (2) is a sharp and short wave. How sharp? Most likely 50% pullback to 7400 but I wouldn't want to rule out the possibility of a 100% retracement even though the chances is slim. Don't forget anything can happen in stock market.

To Sell or Not To Sell ?

"Sell"? After selling the worry is that the stock will start to run, and the worst thing is it runs away very very fast.

"Not to sell"? The worry is that the price will drop back to the purchase price and it can be worst, the price can go much much lower than the purchase price.

For longer term investor that has no time to monitor the market, it is better to hold on to the stock until the major up-trend is over before end of 2009.

For those thinking of taking profit before the correction set in and with the intention of buying back at a lower level, the best way is to look at the market as well as the stock's chart and to decide whether it is the right time to sell. For example let's look at the following Lion Industry chart.

Based on the wave count, the stock has completed its wave 1-2-3-4 and is currently at wave 5. The minimum level for wave 5 is the top of wave 3 at Rm1.05. Wave 5 usually can be a temporary top follows by a corrective wave that can bring down the price to wave 4 level of Rm 0.80. Watch out for possible extension of wave to 6-7-8-9. The technical indicators of stochastic oscillator and williams momentum indicator have remained at the upper range for an extended time is another sign for taking profit with the intention of buying back later to ride on the next higher level wave.

For TA wave 5 has formed, no harm in taking profit. Money in the pocket is always better than profit on paper. The same is true for OSK as shown below.

It is good to look at the overall market index such as KLCI to double check the timing for taking profit. Looking at the KLCI above, the composite index has completed 5 waves with all technical indicator showing an over-bought situation, the probability is high that the timing is right. Technical indicator alone without the wave count is not that reliable as a timing device. Just look at both the indicators as shown above, the first time the indicators have moved to the top was when KLCI reached 880 in early April, since then the indicators moved side-way at the top while KLCI put on another 110 points to reach 990. But in a 'normal' market these indicators usually 'well behaved'.

KLCI requires confirmation from Dow in its wave count. As shown above, the trend for both KLCI and Dow is almost the same.

The Las Vegas Sand's chart and indicators illustrate clearly the danger of using technical indicators as timing device without considering wave count. In November it was right to buy when indicators hit bottom. But in mid January when both indicators have dropped to the bottom, it is disastrous to buy. The stock price was about US$6.00 then. The price continued to drop until US$1.42 in March while the indicators continued to stay low and moving side way. In late March when the indicators reached the top for the first time the stock price was US$3.00. To sell at this point is again a mistake. From US$3.00 the stock price continued to climb until US$8.00 while the indicators were moving side way at the top. This phenomenon always happen during extreme market condition.

Wednesday, April 29, 2009

Stock Market's Reaction to Tragic Events

Many years ago I came across a paper on stock market reaction to tragic events. The conclusion of the paper was " in a major market cycle irrespective of bear or bull, any tragic event or disaster has no significant effect on the long-term/major market trend". The impact of tragic events to the stock market is short-term in nature. From the following charts that marked some of the tragic events, we can examine each individual impact to the stock market.

The bombing of Pear Harbour on 7 December 1941 as indicated on the above chart, the event was at the end of the 1937 to 1942 bear cycle. If the asterisk is removed from the chart, one can hardly pinpoint the location of the event. The event provided a reason for a climax sell-off to mark the end of a 5 years bear cycle.

The assassination of Martin Luther King on 4 April 1968 did not reflect as a bearish event on the chart. There were several sharp pullback to the bull run before and after this event that has no historical impact.

The Cuban Missile Crisis in September and October 1962 was unable to stop the new bull from running and the 22 November J.F. Kennedy assassination did not reverse the course of the bull run. Similarly if the two asterisks and the years indicator were removed from the chart, nobody is able to locate the events from the chart.

September 11 bombing of the World Trade Centers in 2001 took place during the Dot-Com bear market. The Dow had been falling before the event (Osama dumping US stock in advance ???), the sharp sell down had given traders a chance to make money. Sars in early 2003 had given a reason to the market to have its wave 2 pull back before the wave 3 run-up. Similarly the current swine flu, I believed, is providing a reason to the current market to consolidate in preparation for the next surge.

Tuesday, April 28, 2009

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.

Sunday, April 26, 2009

New York Stock Exchange - Strong Accumulation

The OBV (On-balanced volume) plot with respect to Dow indicates very strong accumulation of stocks in the New York Stock Exchange. In fact the accumulation has started since Dow's intermediate low in November 2008. OBV was very strong before the March 2009 sell-off. There was clear divergence between Dow and OBV in January 2009, they moved in opposite directions, Dow moved down whereas OBV moved up. On March 9 even though Dow has set a new low but the OBV was at about the same level as the November 2008's low. In the last 10 days Dow has been moving side-way whereas the OBV has consistantly moving upwards indicating strong accumulation. If the saying, "volume preceeds price" is true, I would expect the Dow to break out and move upwards in the same direction as OBV after the current consolidation phase.

Mulpha International

Mulpha International is another company with a large piece of prime land in South Johor Economic Region (SJER). It has 800 acres of land at location as shown below. Its land is located nearer to the Second Causeway.

Mulpha International is a diversified conglomerate with shareholder's fund exceeding Rm2.1 billion. The Group's focus is on real estate and property related services and financial services, with operations and investments in Malaysia, Vietnam, Singapore, China, Hong Kong and Australia. Over the years, Mulpha has leveraged on its expertise abroad to become Malaysia largest real estate investor and developer in Australia.

Its 4th Quarter result (ending 31 Dec 2008) has recorded a negative 8.16 sen per share mainly due to its share of impairement losses by FKP Property Group (an Australian Associate) mainly in respect of its properties totalling Rm 98.69 million. Its NTA on 31 Dec 2008 is Rm 1.69.

In 2008 Mulpha International has bought back its own shares from the open market totalling 40 million shares at an average price of Rm 1.07. Mulpha has continued its share buyback in January 2009 with an average purchase price of Rm 0.44. Total number of shares retained in treasury is about 77 million.

From its long-term chart as shown above, it has moved down in 7 waves from its 2007 peak of Rm 2.10 to Rm 0.27 on 30 March 2009. Wave 6 may look small in magnitude in this linear chart when compared to wave 2 and 4, however if one refer to a semi-log chart, wave 6 (+37%) will look comparable to wave 2 (+23%) and 4 (+42%). In Elliott's wave count, 7 waves can be taken as wave A-B-C. Wave 7 at Rm 0.27 can be considered as the bottom. The wave count since 30 March 2007, from Rm 0.27 bottom is as shown below.

Since the Rm 0.27 bottom, the trading activity of Mulpha has incresed greatly as shown above. To date it has completed its wave I and II and sub-wave 1-2-3-4 of wave III. It is currently in sub-wave 5 of wave III. Last Friday it closed at 44.5 sen. Wave III is likely to stop at 49 sen, the top of wave 6.
In 2006 UOB Kay Hian's Reports, using RNAV (Realisable Net Asset Value) approach, the Price Targets for Mulpha are as follows:
(a) Based on Bayan Lepas, Penang Mixed Development Land of Rm 30 per sq ft the price target is Rm 2.68
(b) Based on Damansara Development in Selangor of Rm 60 per sq ft, target price is Rm 3.34
(c) Based on Johor Baru City Centre (Commercial) 0f Rm 110 per sq ft target price is Rm 4.42
(d) Based on Singapore Rm 300 per sq ft target price is Rm 8.55 (wah !!!!)
All the above figure can be found in UOB Kay Hian 2006 papers.

Saturday, April 25, 2009

Tebrau Teguh

While going through my collection of old reports from investment houses, this 2006 research paper from UOB Kay Hian attracted my attention. The report was on Iskandar Development Region (IDR) also known as South Johor Economic Region (SJER), which is the main southern development corridor in Johor. Area involved is about 2216 sq. km. 3 times the size of Singapore and 48 times the size of Putrajaya. The area is as shown below.

Major players are UEM Land, Khazanah, Tebrau Teguh, Danga Bay, Mulpha International, Gamuda, SP Setia and many others. Amongst these players, Tebrau Teguh own the best and the last piece of large landbank near Johor Baru. The land measuring some 1,012 acres with a gross development value of RM7.9 billion. Its land is 'super-prime' for several reasons:
(a) It is one of the last big tract of undeveloped landbank near Johor Baru, it is within 5 km of Johor Baru City Centre.
(b) It has 12 km of water front.
Tebrau Teguh (42% owned by Johor State Government) has won a Rm303 million contract recently from the Johor State Government to construct 2932 units of low cost apartments in Johor Baru to relocate squatters affected by eastern dispersal link highway.

UOB Kay Hian used RNAV (Realisable Net Asset Value) approach to project the targeted stock price for Tebrau Teguh.
(a) Based on Bayan Lepas, Penang Mixed Development land of Rm30 per sq. ft, price target is Rm 1.80.
(b) Based on Mixed Development in Damansara of Rm60 per sq ft. the price target is Rm3.77
(c) Based on Johor Baru City Centre Commercial Development of Rm110 per sq. ft, the target price is a fantastic Rm7.06 (Hard to believe).

(d) Based on Singapore's Rm 300 per sq ft the target price is Rm 19.56 (wah !!!!!!!!). I purely report what was stated in UOB Kay Hian 2006 papers. But of course I would be very very very happy if it can reach Rm 19.56 because Rm 55,000.00 investment (100,000 shares) can turn into Rm 1.956 million. (Fantasy)

The above long-term wave count indicates that the 30 cents low on October 2008 for Tebrau Teguh is likely to be the bottom. Refer to the 6-month chart below, Tebrau Teguh has completed its wave I and wave II by middle of March 2009. It is currently in wave III and so far it has completed sub-wave 1, 2 and sub-sub-wave i-ii-iii-iv. Sub-sub-wave v has started since last Wednesday. Friday closing was 55 cents with very high volume. Minimum target at this moment based on 1.618 times of 'wave I' magnitude, wave III is likely to reach 74 cents.

Diagonal 5 for Dow (Option 3) is out.

Remember the option 3, the possibility of a "Diagonal Wave 5" for Dow that after completing its wave 2/5 at the current level, it would continue downwards to retest its March 2009 low of 6547 to form wave 3/5 that I have mentioned in my previous post as shown above? Dow on Friday clossing, has put on 119 points (1.5%) and Nasdaq has put on 42 points (2.5%). If one will to look at Nasdaq Chart as shown below, one will notice that the 42 points closing for Nasdaq at point Y as shown below has practically ruled out the "Diagonal Wave 5" option. Y is simply too much higher than point 4 to be considered as wave 2/5. If point Y can not be wave 2/5 then the three waves down from wave 4 can not be wave 1/5 as shown below, I have no choice but to revise my previous wave count for Nasdaq.

The only way to take care of the three down waves in early 2009 is to go for a complex A-B-C-X-A-B-C wave count. As shown in the 2-year chart above, from the peak we have i-ii-iii-iv-v wave A, a wave B rebound followed by a i-ii-iii-iv-v wave C. Next is a three waves rebound wave X followed by an A-B-C that ended on 9th March 2009. Since Dow and Nasdaq wave pattern have to be the same from a mega perspective, I shall adopt the same A-B-C-X-A-B-C count for Dow as shown below. This alternative way of counting takes care of the three waves down before reaching the 6547 March bottom and there is no missing wave that I have mentioned previously

If this A-B-C-X-A-B-C is acceptable as it does not violate any of the Elliott's Wave Pronciples, the wave formation after the March 9's bottom has narrowed our previous development of options to only 'option 2' as shown below.

In option 2 as shown above, we have a "leading diaogonal" wedge formation to form wave i followed by wave ii-iii-iv and v to complete 'wave 1' which is another higher degree "leading diagonal" wedge formation as shown above. Currently the Dow is forming a-b-c-d-e corrective wave 2, it has completed a-d-c and currently on mini wave d. The next down will be mini wave e. If Dow started to break out from here next week and move higher, then that will be the Wave 3 that can reach 10,000 (1.618x wave 1). If Dow needs to consolidate for a longer period, wave 2 can take a more complex form instead of the simple a-b-c-d-e then the consolidation period will be lengthened by another 7 to 10 days.

By this stage of Dow's chart form, the bullish 'Option 1' that I have ruled out not many days ago has returned as shown below.

After the bottom on March 9, Dow formed a "leading diagonal" wedge formation wave 1 as show above. A two days pullback wave 2, followed by another "leading diagonal" wedge sub-wave i and a one day pullback sub-wave ii. Two consecutive "leading diagonals" is a very bullish formation. After the sub-wave ii pullback, there was a one day rebound followed by another small one day pullback (-83 points) on Wednesday and a up candlestick (+71 points) on Thursday and another longer up candlestick (+119) on Friday, next Monday if Dow can break away, it will be a condlestick of more than 250 points. It has to be that powerful because we have two "leading diagonals" and a 1-2, i-ii and 1-dot 2-dot situation, very bullish indeed. The negetive signs are the technical indicators that have been hovering at the upper ends for quite sometimes indicating overbought situation. But as I have said before, in extream market conditions at market top and market bottom indicators have the tendency to remain at the to or bottom for a much much longer period. The moment the indicators hit the top and if one started to sell his stocks, he could have been out of the market two weeks ago and we know how the market has moved in the last two weeks and all the technical indicators have been hovering at the top for the last two weeks.

Wednesday, April 22, 2009

Cagamas - The Fannie Mae of Malaysia

Cagamas (National Mortgage Corporation) is Malaysia's version of Fannie Mae of US except that Cagamas is not a public listed company. It was established in 1986 to promote Secondary Mortgage market in Malaysia seeking to aid Malaysian with affordable housing.

Its Vision Statement - Cagamas is committed to promoting home ownership in Malaysia by providing financial product that make housing loans more accessible to Malaysian, especially the lower income group.

Cagamas purchases housing loans, hire purchase and leasing debts, credit cards receivable, islamic house financing debts, etc. from banks and other financial institution and government. It funds its purchases of loans and debts through the issuance of Cagamas Debts Securities (bonds, notes, etc.). This funding mechanism is different from that used by Fannie Mae that repackaged the debts that was purchased from the banks into mortgage backed securities and sell them to investors. Total Cagamas debts securities still outstanding in March 2009 is Rm 15.795 billion with maturity period varies from 1 to 20 years.

One interesting thing about the loans and debts that Cagamas has purchased from the financial institutions is that Cagamas does not see, check and keep the loans and debts documents that it has purchased. Cagamas appoints the selling institutions as custodian and continue to keep the security document that they have sold (the bank sold the housing loans to Cagamas but the bank still kept all the loans document with them, Cagamas is not required to see and check the document). All that Cagamas received is an annual auditor report from an external auditor of the selling institution that has carried annual audit on loans and debts that the institution has sold to Cagamas (the auditor is paid by the selling institutions and works for the institutions, he is the institution's man). We are talking about Cagamas assets (mainly consists of debts that it has purchased) that were valued at about Rm 24 billion ( 2007 annual reports) that it has purchased but it has no need to see and check the documents that were being kept by the seller and audited by seller's external auditor.

Tuesday, April 21, 2009

Earth Day - April 22

Our One and Only One Beautiful Big Blue Marble

US Senator Gaylord Nelson is the founder of 'Earth Day', a day designed to inspire awareness and appreciation for the Earth's Environment.
One historical event has taken place last Summer August 2008, "First time in human history, the North Pole can be circum-nevigated", this was the headline in some European newspapers. For the first time in 125,000 years, the North-West Passage around Canada and the North-East Passage around Russia has simultaneously openned as shown below.

These passages had been blocked by ice since the begining of the last Ice Age.

A few weeks earlier, 9 stranded polar bears were seen off Alaska trying to swim 640 km north to the retreating ice-cap edge.

Mt Kilimanjaro in north-eastern Tazania, is the highest mountain (at 5,891.8 metres) in Africa.

From 1912 to 2001, Mt Kilimanjaro has lost 82% of its snow cap/ice cover. Aerial photos of the mountain taken in 1998 and 2005, as shown below, illustrate clearly the impact of global warming.

Mt Hood in Oregon USA as shown below is having the same fate as Mt Kilimanjaro. The top and bottom photos were taken in 1985 and 2002 respectively. Similarly it is the work of global warming.

One of the main causes of global warming is the "Greenhouse effect".
Greenhouse effect is a natural phenomena occurring on planet Earth and it is very essential for life on Earth. It is a fact that we can not live without it. Life on earth depends on energy from the sun. About 30% of the sunlight is deflected by the outer atmosphere, 70% reaches the earth surface (to support life and ecosystem) and is reflected upward again as a type of energy called infra-red radiation. As the radiation rises, it is absorbed by "Greenhouse gases" such as water vapor, carbon dioxide, ozone and methane, which slow down its escape from the atmosphere and help to regulate our climate. Without this "Greenhouse Effect" scientists estimate that the average on earth would be colder by 30 degrees Celsius. (KL town centre would have a temperature of +5 degrees celsius at noon and -5 degrees celsius at night). The problems begin when human activities create more greenhouse gases than what is required to warm the earth to an ideal temperature.

Human activities produce excessive carbon dioxide and other gases, waste, toxic waste, acid rain, sewerage, etc and human consumes the earth's resources at an accelerated pace and simultaneously causing irreversable damages to the earth through deforestation, mining, farming, etc.

To help to prolong the life of this Blue Marble, we can start by "consuming less" and "wasting less" (material, water, power, etc.), by " reduce, reuse and recycle", by walking more and driving less, by going organic, paperless and tissueless, by bringing your own bags for marketing, by bringing your own containers for take-away foods, by......................Don't forget to plant more trees, grasses and flowers.

Monday, April 20, 2009

KL Composite Wave Count With Respect to Dow Option 2

With respect to Dow Option 2's wave count, the likely corresponding wave count for KL Composite index is as shown below.

KLCI will take 2 to 3 days to complete the mini wave iv and another 4 days to complete mini wave v of sub-wave (iii) before it proceeds with higher degree sub-wave (iv) and sub-wave (v) to complete the wave 3 at around 986 if wave 3's magnitude is 1.618 times of wave 1's magnitude.

The above chart is the 5-year longterm chart for Inch Kenneth Kajang Rubble PLC. I have mentioned this stock in my April 12 post. The stock price was about 22 sen then. The stock was very active lately, I suspect the 600 acres land deal near Bangi is in its final stage. After the 50 for 1 bonus issue in 2005, the stock price of Inch Kenneth has gone through a major A-B-C consolidation, its low of 16 sen in March 2009 marks the end of wave 9. It is likely that wave C has ended and 16 sen is the bottom for this stock. Its price movement since then is as shown below in candlesticks form.

The stock moved with high volume to complete its wave 1 last week. After pulled back for 2 days, quite unexpectedly it started its wave 3 movement. Currently it is in its sub-wave i of wave 3. If wave 3's magnitude equals to 1.618 times that of wave 1, wave 3 will end somewhere near 44 sen. Projection is usually used only as a rough guide, actual ending point depends on market sentiment as well as the ultimate wave form.

Dow Dropped 3.56%

The whole red candlestick of 289 points (3.56%) drop for Dow confirms the 'Doji' reversal, it also rules out the bullish Option 1 wave count for Dow. Option 2 for Dow can take either an a-b-c formation for wave (2) or an a-b-c-d-e wave (2) as shown below.

a-b-c correction will take about another 3 days whereas a-b-c-d-e formation will drag for another 7 to 10 days. I think a-b-c-d-e is more likely.

If Dow continues to come down sharply then it is going for Option 3 for a diagonal wave 5 formation as shown above. Dow can retest the March 9 low of 6547.