Saturday, October 11, 2014

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 5th week, 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.