Pauline Yong Blog
A Market Correction or A Bear Market
The stock markets around the world have the biggest selloff since January this year. Many are wondering if this is just a normal correction or the beginning of a bear market. I would like to share with you some of my thoughts.
From the fundamental perspective, in order to initiate a bear market we need to see a "crisis", it could be a financial crisis, political crisis, epidemic crisis or catastrophic crisis. On top of that, the most important factor is the investors' sentiments towards the crisis. For example, we have the Ebola, the middle east political unrest and the European debt problems now, whether we view these problems seriously or shrugged off the news depends on our experiences towards these news. If we had similar experience towards certain news, we would probably react bearishly for a shorter period of time than news that are something new for us. Sometimes small news may trigger big reactions from market participants. I had some study on the effect of moon and the psychology of investors, and statistics did show that investors' sentiments are easily influenced by the faces of moon and the eclipse of moon. If you are aware that we just had a lunar eclipse on October 8th and the stock market reacted bearishly around this date. In some cases, if the selloff is severe, it may violate important trendlines and once the damaged is done, it is difficult to recover within short period of time.
From the technical perspective, it is "normal" to see a correction in stock prices once in every three month or so. This is due to profit taking when prices moved higher. In addition, in every few years we shall see some bear markets that last for months. In this article, I would like to share with you some simple statistics on a "market correction" and a "bear market".
Market Correction
A market correction occurs every 2-4 months, and it usually lasts 2-8 weeks, prices may fall from 5%-15%. For KLCI, we hardly had any price correction that is more than 5% this year except in January, the correction lasted for 6 weeks, and now our KLCI is quite close to the 5% correction.
Bear Market
While a market correction is considered "short term", bear markets can be "medium term" or "long term". Medium term bear market lasts for months, long term bear market last for years. The price fall is more drastic, we may see prices fall from 15%-60%. Although by definition, prices drop more than 20% is considered officially a bear market, but I do see 15% price fall that lasts for 6 months which is considered a medium term bear market. (e.g, the US debt crisis, KLCI 2011 Aug - 2012 Jan bear market).
Possible scenarios
I do not wish to speculate if this is a bear market, let's hope that it is a market correction.
If we believe that we are now having a market correction, we shall see 2 - 8 weeks of market correction started from September 12, and the prices are stated below:
S&P 500: price fall 5% - 15% which is 1920 - 1720.
STI: price fall 5% - 15% which is 3200 - 2868.
KLCI: price fall 5% - 15% which is 1795 - 1606.
Time target: We have past 4 weeks, next week is the 5thweek, and by Nov 7th that's the end of 8th week.
The above are relevant for index as the statistics are based on the indices historical charts. The study of index chart is to give investors an overall sentiment of the market.
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Discussions
6 people like this. Showing 19 of 19 comments
This is just a deep correction which we need! But this is also the last 2 rallies before the market kaput!
2014-10-11 16:48
Thought more than 10% baru saja Correction...
Below that is your average everyday fluctuations...
But anyway nampak baru drop below 5% now pun ramai sakit kat pocket dan hati jua dah tak terhingga...
2014-10-11 17:38
Dear Pauline,
I agree with your comments with respect the lunar eclipse and human emotions / behavior. 65% of the human body is comprised of water. Gravitational forces affect our daily lives, evidently observed in high & low tides. Since the human body revolves around water, by no means we could be affected as well. Numerous studies have reported the lunar effect on animals and for humans : fear, aggression, reproductive behaviour/desire etc...I had a contact who told me once that the French police force generally observe a peak in criminal cases during full moon. Believe??
Back to the market, we experienced a heavy sell off in global stocks on the 28th February 2007 (originating in China and then around the globe) for 3 consecutive days. Coincidentally, a total lunar eclipse took place on the 3rd March 2007. Any correlations, it's your turn to figure it out.
However, I am VERY convinced that you forgot to mention 'the mother of all storm' reason for this perfect storm. We have Ebola, political uncertainty in eastern Europe & Mid-East, deflation in Europe (sharp drop in French & German exports), slowing Chinese economy (& BRICS - Brazil, Russia, India, China, S.Africa) AND THE END OF THE QE THIS MTH. Cheap money from the QE is now being pull back from global markets. Significant confusion from the FED meeting minutes provides additional uncertainty. Some understood that the FED will be keeping the low interest rates for a significant amount of time until the US economy further gathers steam. But a non-voting FED official signalled that this was rather a 'misinterpretation'....until this clears out, we will see a further downside in equities which is rather NORMAL with respect to A LONG DUE MARKET CORRECTION.
Nevertheless, EU is currently experiencing stagnant growth (turning negative) and deflation. ECB COULD BE ACTING SOONER THAT YOU THINK. They will start their OWN SYSTEMATIC QE soon before things turn uglier !! Previous attempts were dedicated to Germany's resistance and now that situations are getting uglier in Germany (significant drop in German exports - never seen before since 2009), Mario from the ECB is working on the prospects. A HIGH IMPACT ECB QE?? Let's wait.........and see.
This is a PERFECT storm with all the ingredients well matched together with the QE withdrawal being THE MOTHER INGREDIENT (Ajinomoto), i.e. significant foreign fund outflows while local institutional investors stayed on the sideline. Dampening growth sentiments have taken its toll on crude prices, whereby the US is now self sustainable with their own US shale production and decreasing global demand. Sell off in oil & gas counters is also a major culprit for the rout...
With the US FED gone and ECB drafting up plans for a QE, it is worthwhile to observe whether Asian central banks will trigger their own QE after that or perhaps much sooner than you would think, e.g. China. If that happens, a currency war is imminent with the USD being the ultimate winner. BNM can sure be happy sitting on billions of USD reserves..:)
Upcoming events:
1) Actions from the ECB on a more effective QE?? Cheap money again??
2) Currency war?? Flooding of Chinese cash??
Cheers,
NK
2014-10-11 20:06
US mkt drop because too much short selling. Anyone without holding share can sell with the hope to buy lower. Our market is different. You need to have company X shares before you can sell. Thus downside will be limited and this provide buying opportunity for selective counters.
2014-10-11 20:17
Dear pauline_yong n all,
In times like this n at all times, it is best advice to always refer to world best of the best Guru.
He is so kind to put it simply in minimum words n comma :
G SOROS -
"Economic history is a never-ending series of
episodes based on falsehood and lies, not truths.
It represents the path to big money.
The object is to recognize the trend whose premise is false,
ride that trend, and step off before it is discredited"
Here too, http://klse.i3investor.com/servlets/cube/post/purebull.jsp
2014-10-12 00:49
even it is 20% correction into bear market, it depends how long we stay there. It can be V shape rebound Or years of Bear market.
In stock investment, we Only worry about long years of Bear market.Years of Bear market will be like lost generation and investment return will be low and sub-par for many years.
2014-10-12 11:38
End of day it is your stock pick ya.
To make money, it is your stock picks. Overvalue or Undervalue, it is stock picks. Average down or Not, it is your stock picks. Long term investment or Not, it is your stock picks. Cash or keep investing, it is your stock picks.
2014-10-12 14:06
A market correction is a bear market always,baby bear,mother bear or grandmother bear.
2014-10-12 14:46
finishing of the year sure will go higher,,,now it is better to cool of overheated markets,,just by pumping in some negative news.. when markets are on uptrend any negative news won t be look at..but when to cool off,,overheated market all the negative news will be look upon.. MAIN IDEA HERE IS TO COOL OF OVERHEATED MARKETS.. I MEAN MARKETS THAT ARE TRADING AT OVERVALUE LEVELS... THIS IS HEALTHY FOR MARKETS..WE STILL HAVE NOVEMBER N DECEMBER...SO BETTER FOR CORRECTION TO TAKE PLACE NOW..IT S MY OPPINION
2014-10-12 15:15
X
"In determining the pace at which our monetary accommodation is removed, we will, as always, be paying close attention to the path of the rest of the global economy and its significant consequences for U.S. economic prospects."
Large developing nations like India and Brazil have been concerned a rise in U.S. rates could suck investment away from their economies, just as they earlier criticized the Fed's bond-buying stimulus as a "currency war" that caused a fast increase in their currency values.
Fischer said in the keynote IMF address that the Fed's crisis programs, which pumped trillions of dollars into global markets, have on the whole benefited the rest of the world.
"The net effect on foreign economies appears to be both modest in magnitude and most likely positive, on net, for most countries," he said.
In addition, he said U.S. central bank officials have given national governments and investors plenty of time and clear signals to prepare for a shift in policy.
The Fed is "going to great lengths to communicate policy intentions," Fisher said. "Markets should not be greatly surprised by either the timing or the pace of normalisation." - Reuters
12/10/2014 14:34
2014-10-12 15:33
The drop in price of crude oil had spooked the market n created great uncertainty on the global stock markets. There is new evidence that the drop in crude oil prices is being manipulated to punish Russia. The key question to ask are
- will global consumption of energy decrease or increase in the future?
- can the supply of unconventional shale oil have a sustained significant impact on future crude oil supply ?
The global demand for energy produced from crude oil n gas will continue to grow as more n more emerging market countries in former Soviet republics, Asia n South America aspires for US n Western European lifestyle. This can only mean that the demand for energy will increase in the future. Major oilfields in the world r facing declining production n many have resorted to enhanced oil recovery to try to maintain production volume.
Unconventional shale oil n gas accounts for 2%-3% of world supply. The unconventional shale oil n gas has maximum production during the first year n thereafter the production tails off at an exponential rate where the maximum life of the shale field is 10 years. It may even be shorter.USA is now a gas exporter but how long can USA continue to export unconventional gas? The export may not be sustainable over a long time period as shale oil n gas production will be unreliable.
So the key question to ask is how long can the Price of crude oil remain at around USD 90 given that the people in the emerging economies in former Soviet republics, Asia, South America aspire for US n European lifestyle which consumes high energy on a per capita basis? As energy consumption grows in the future, the future demand for crude oil n gas may even exceed the future supply.
2014-10-12 18:50
Investment clock is at 1205hr. What else do you expect? Want more indicators to confirm? It will be 1500hr then. Run for your live now!
2014-10-12 23:07
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Could be a market pullback similar to that in Y2011, dropped about 300pts.
2014-10-11 16:08