Friday, November 23, 2012

10 yrs Cycle and the KLCI

In response to a reader's question whether this cycle theory applicable to the KLCI. Below are the charts for the analysis:

1. 1980 - 1989
In the 80's we can see from the chart above, the KLCI was choppy with a horizontal trend with price index ranging from 200 to 500. It didn't follow the 10 year cycle theory whereby the first few years should be low, and there should be a run-up in the middle of the decade, finally reaching a peak at the later years and follow by a crash. However, in 1987 there was a crash of about 50% from its peak.

2. 1990 - 1999
In the 90's we can see clearly that the KLCI followed the theory whereby there was a nice run-up till 1997 and followed by a severe down turn with price index dropped 80% from its peak.

3. 2000 - 2009
Again during the millennium decade, there was a consolidation in the first few years, then price index had a steep rise from 2006 on wards and reaching the peak in 2008. This round, the KLCI dropped 42% from its peak.

From the above findings, we learned:

  • except the first chart, first few years are consolidation years whereby prices are lower compared to the later years.
  • prices tend to double from the year 0 to the peak. In the 80's KLCI started with 200 and reached a peak at almost 500 in 1987; In the 90's KLCI started with 600 and ended up at 1200 in 1997; Except in 2000, KLCI started with 1000 and reached a peak at 1400, but if you were to count from the low of 600 in 2001, it was more than double.
  • In the 10 year period, there are phases of consolidation whereby prices move within a tight range before a breakout either to the upside or the downside.
  • The crash is usually steeper and the duration is shorter than the bull trend.
There are many reasons for the way stock prices behave, in the technical analysis perspective, it is assumed that history repeats itself, from the past data we can predict future price movement. 

Having said that we have to acknowledge the importance of knowing the fundamental analysis too. The best trader will use both in their analysis. 

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