WD Gann once said, "Everything moves in cycles as a result of the natural law of action and reaction. By a study of the past, I have discovered what cycles repeat in the future."
How amazing, by studying the historical price data, we look at the statistics and generate the probabilities of how price action repeats itself. After all, that's the most important assumption of technical analysis that "history repeats itself".
Now, let's take a look at the following chart that I published before in May this year.
Gann was able to forecast the 1929 stock market crash accurately in advance and he shared his secret in his publication that in order to forecast for that particular year, all you need to do is to look at the previous years that end with the same number year. For example, to forecast for 2013, you may study the price action of year 2003, 1993, 1983 and so on.
Unlike the Dow Jones Industrial Average that has 100 years of history, KLCI only has less than 40 years of data. So I go to this website: Tading Economics to get the required data.
From the data, I see that the year ending with '3' is always a bullish year for Malaysia, the chances are 3 out of 3 bullish. This findings help me in planning for my investment into the stock market this year.
In one of my previous article I mentioned that August to November this year would be volatile and it would be suitable for shorter term trading because I saw that the 1983 chart showed that the second half of that year the price action was zig-zag in a horizontal trend. In addition, there were some important fundamental reasons such as the Fed tappering, our Malaysian Budget and other fundamental reasons that help me to come to that conclusion.
So if you are wondering what's the market outlook for 2014, let me show you the next chart:
Looking at the chart above, we know that 2014 would be different from 2013, we do not have a clear-cut bullish trend. Investing in the stock market will be more challenging but I'm still optimistic about the Malaysian stock market as over the years we have proved that we are less volatile than the regional markets, as we have strong support from the local institutional players.
Below are some thoughts that may affect the market in the near future:
1. Construction and Property Sectors
According to the BMI (Business Monitor International) review on the Malaysian construction sector, they believed there will be some slow down in the construction sector in 2014 due to the falling demand for residential and non-residential buildings. They have maintained their construction growth forecasts for 2013 10.1% and 2014 to be 6.7%.
The property sector will experience some slow down as well due to the cooling measures by our government to curb speculative property activities. I believe this pull back is healthy for our economy as the property market need the necessary consolidation phase to digest the excess supply in the market.
2. Low Interest Rates
With a ultra low interest rate environment globally, the chances of running into a financial crisis is low. Unless there is inflation problem that force the Central bank to raise interest rate, otherwise, we are likely to enjoy this until 2015.
3. Excess Liquidity in the Economy
Ironically, quantitative easing is the biggest driver to drive the financial markets to the ceiling and yet it is currently the biggest risk posed by the financial markets. In this quantitative easing process the Central Banks from the EU, US, UK and Japan kept pumping in the liquidity into their banking system. In fact JP Morgan's Nikolaos Panigirtzoglou, an expert in global monetary flows and liquidity, said the current excess liquidity is the most extreme ever as compared to the past 3 major episodes of excess liquidity namely: 1993-1995, 2001-2006 and 2008-2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at that time.
Since the 1990's the Fed has been playing the money game by pumping in money each time after a financial crisis instead of long term investment in real products and education. The excess liquidity is doing the economy no good as it merely drive up the asset prices and not protecting our purchasing power parity.
In order to play along with the music, everyone has to dance regardless whether you like to dance or not. Just like in this money printing world, we are losing purchasing power with our fiat money, we are force to invest in this risky asset environment regardless whether we like it or not, as long as we know the Fed is pumping money into the system, we have to participate in the equity and property markets to protect our purchasing power. If we do not dance with the music we will be losing out.
At the end of the game, we need to win the game beautifully but the problem is how? Because we never know when will the music stop. Right now, keep investing as the music is still playing around the world.