The US Pump Priming Is Working Well For The Stock Market

For the past one week we saw the US S&P500 index has crossed its 200 day MA for the first time since February before the outbreak of the pandemic.The 200-day MA is a technical indicator used to identify and analyse long term trend. Above 200 day MA means long term bullish and vice versa. The NASDAQ has crossed has crossed above this line more than one month ago. The Dow Jones Industrial Average which represented the top 30 largest cap stocks in US is still lagging behind with the index still below its 200 day MA.


The prime pumping by the US government has proven to be quite effective with a V-shaped recovery in the stock market. It would be difficult to imagine if the US government can do this again should there be another black swan event within 1 year.

The retail investors are the major participants for the US stock market during this pandemic. This article indicated how the retail investors took over the US stock market https://www.zerohedge.com/markets/how-retail-investors-took-over-stock-market. 

In the above article, the chart indicated that the clients positions in stocks with Robinhood (A US brokerage firm) has more than doubled since the US lockdown. For you information, it is currently commission-free to trade in many of the US trading platforms. With zero cost to the retail investors, they are making a big wave into the stock market.

In Malaysia, although we do not have zero cost in trading, but many Malaysians do realise that the pandemic led recession is an opportunity to make money in the stock market. We can see that in our market participation statistics that the local retail investors had became the net buyers of the local stocks during this period as well. https://www.bursamalaysia.com/market_information/market_statistic/securities

What happened to the economy? Are we not seeing all the negatives in the economic data? Yes, but our stock market is driven by sentiments and emotion. When investors see the massive stimulus package initiated by the governments around the world, the sentiments helped to put more liquidity into the stock market as the interest rate is historical low. Here is a macro view of the stimulus packages around the world: https://howmuch.net/articles/worlds-economic-programs-against-coronavirus

As you can see that the extent of the stimulus is unprecedented.  The governments are applying expansionary monetary and fiscal policies to help stimulate the economy regardless of how much debt burden will be added for this round.


 Below are the trading range for the 3 markets namely the S&P 500, KLCI and the STI:

S&P 500: The S&P 500 gained 25pts or 0.8% for the week at 3044. It also gained 191 pts or 6.6% for the month of May. The index has now crossed its 200 day MA which is another milestone, besides its 50% retracement milestone. Technically, the US market is bullish and looks like the trend will continue further.The trading range is between 2975 to 3075.

KLCI: The KLCI gained 36pts or 2.5% for the week at 1473. On a monthly basis, it gained 65pts or 4.7%. The index is above the 20day MA but below the 200day MA. The index has been bullish led by the rubber glove industry and the local retail participants. What happened to the economy? Well, at this moment retail investors are overly excited about the stock market and they will temporary ignore the fundamental for now until we encounter another bad news. Next week, we are looking at the support at 1430, resistance 1500.

STI: The STI gained 10pts or 0.4% for the week at 2510. For the month of May, it lost 113 points or -4.3% for the week. The index has underperformed the regional markets together with the Hang Seng Index.  Currently the index still remained at below both the 20 day MA and the 200 day MA. Next week trading range remained at between 2475 to 2575.

KLCI Historical Chart 1981 - 2020

  
It is our belief that history repeats itself in the stock market because human nature and investor psychology don't change. Therefore, analyzing historical charts can be a helpful guide for interpreting current and future market trends.

Personally I pay close attention to the KLCI historical data and charts. A few years back, while many were forecasting the next stock market crash was in 2018 but I had a different view. I was comparing the relationship between the Malaysia stock market with the GDP growth rates and based on the figures (if history were to repeat itself) the next market crash (that will lead to recession) should not be 2018 but a much later date. I will not disclose the year here but to let yourself do the calculations yourself.

(Chart By Bursa Station: http://www.bursastation.com/?page=download)

The diagram above showed KLCI 1982 to present. The 2 circled represent some similarities despite it is 20 years apart. 

• The bullish years are: the year ending with 1,4,7 (with + or -1 yr)  

• The bearish years are: the year ending with 2,5,8 (with + or - 1 yr) 

 In addition, there were not many years that our GDP growth registered a zero or negative, and the years were: 1975, 1986, 1998, 2009, hence according to this pattern, if history were to repeat itself, you should be able to deduce the next recession year.

The above are just my personal opinion, there is no guarantee that it will occur as stated above.  Nevertheless, it is no doubt very interesting to study the history in order to have a better understanding of how our stock market works.

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16/5/2020 Weekly Chart Update

KLCI: The KLCI was bugging the trend with a gain of 21 pt is or +1.5% for the week at 1403. The index is above the 20day MA but below the 200 day MA. The good performance of the index was mainly due to the glove manufacturing companies Top Glove and Hartalega, KLCI component stocks that had risen 5%-10% on a daily basis from Tuesday to Thursday due to good future earnings. Perhaps we need to ask ourselves is this future earnings sustainable? How long are we going to see the pandemic last? What will happen to these earnings after the pandemic? Moving forward, the sustainability of the index to stay above the 1400 level depends on the broad market sentiments for next week. The index is not sustainable with a few component stocks well performing. Next week the index support is seen at 1375, resistance 1425.

On the other hand, the S&P 500 lost 61 pts or -2.1% for the week at 2863. The index was once below the 20 day MA on Thu but it managed to closed above the 20day MA line on Friday. The index trend is weakened however, the weekly chart saw a tail in the candlestick chart pattern which indicated some support for the market. Economic data continued to worsen around the globe which is considered a historical moment as many of us have not seen this in our life time. Nevertheless, next week the US market may be choppy as there is a fight between the bulls and the bears and investors will be looking at the technical charts more than the economic data. Next week S&P 500 support is seen at 2800, resistance 2900.

(S&P500 Daily Chart)

(S&P500 Daily Chart)

 

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Unemployment Rate and the Stock Market

Unemployment Rate and the Stock Market

When it comes to measuring the health of a country, investors will look at the GDP and the unemployment rate. Since 2008 Subprime mortgage crisis, we saw the unemployment rate for the US shot up to double digit growth for the first time since the Great Depression. GDP was negative and the stock market crashed 50%!

As Ben Bernake and Janet Yellen, both the former chairperson of the US Fed was focusing on the unemployment figure, they lowered the interest rate drastically to save the economy. In addition, we also saw the US Fed launched quantitative easing (QE), ultimately buying trillions of dollars of government bonds and mortgage-backed securities. Between 2008 and 2015, the Fed's balance sheet, its total assets, ballooned from $900 billion to $4.5 trillion. 

This round, during the pandemic Covid-19, before we saw the unemployment rate increase, the US Fed had even more drastic move, by end of March 2020, the Federal Reserve balance sheet was at $5.3 trillion, up 12.4% over the last week of March. The central bank was greatly increasing the amount of Treasurys and other assets it owns in an effort to keep markets and the economy afloat during the financial crisis.

With the "experience" of the 2008 recession, the Fed offered forward guidance on the future path of its key interest rate, saying that rates will remain low "until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals." 

Let's take a look at the US Dow Jones Industrial Average chart:

 The above chart is a comparison of the different recession events with respect to their duration to reach bottom in the stock market. The 2000 Dotcom bubble from peak to bottom took almost 3 years. While the 2008 financial crisis took half the time of Dotcom to reach bottom. However, if you were to look at the steepness of the chart, the duration of the 2008 financial crisis was shorter and the graph is steeper. The price drop was more drastic than the Dotcom as well. Hence, this gives us some idea what will be the outcome of the current Covid 19 recession. Firstly, in terms of steepness, the current one is the steepest by far as we witness the DJIA had 3 times triggered the limit down circuit breaker. However, in terms of duration, it would be too premature to conclude that the crash was over as based on the previous 2 events, the duration seemed more than 12 months. 

Nevertheless, this round we see governments around the world are employing massive fiscal and monetary policy measures to save their economies and the stock markets. For example, in the US, the Fed had announced that it will buy unlimited treasury securities and government guaranteed mortgage backed securities to shore up the liquidity in its financial system. These efforts have pushed the US stock market to the recent high with S&P 500 almost nearing the 3000 level (the peak was 3400 level). 

The recent unemployment rate of 14.7% is just the beginning. There will be more weak economic data releasing globally. The financial markets operate in a big ecosystem of retail investors, fund managers, financial institutions and government agencies. How these market players interpret the market news will in turn affect the sentiments of the markets, which will determine the next direction of the markets.

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