What Does QE3 Mean?

Someone asked me QE3 announced during the market peak, will the stock price go higher?

To answer the question, let us understand what QE means. QE stands for Quantitative Easing. It is a kind of monetary policy that increases the money supply in the financial institutions, so that the financial institutions have more funds at lower cost for lending.

The key here is "more lending", so that consumers borrow money to spend and firms borrow money to invest, all these will drive at more economic activities and finally reflects in the GDP figures.

Hence, whether QE3 will work depends on the willingness of the consumers and producers to borrow money to expand their economic activities. Let's take a look at the following charts:

The first chart is the US consumer confidence index. We can see the general improvement in the confidence level in the consumer sector.

However, the US business confidence (Chart 2) is rather weak with figures below 50 for the last 3 months.

This may mean that the QE3 of US600 billion of fresh funds may not reach the desired result that the US government wants.

So does that mean we shall stay on the sideline and keep our money in the bank? No! Because your money in the bank will lose purchasing power as the bank rate is negligible. We should invest in dividend stocks and income generated assets such as REITS or even properties.

Recently, I took advantage of the sell down in the KLCI by re-balancing my portfolio. I cut loss on non-performing stocks and switch to dividend yielding stocks. Immediately I see my portfolio appreciated 4% within a week.

Currently, all major indices are pointing at bullish trends, however do take note that the US market has been in an uptrend since June, the next resistance for the S&P 500 is 1480. As for our KLCI, you may want to take into consideration of our election risk, and switch to dividend stocks or REITS.

Happy Investing!

Irreversible Euro

During the ECB press conference last Thursday August 2nd, Mario Draghi, the President of the ECB, mentioned that the Euro is 'irreversible'. A media reporter asked him what did he mean when he said 'irreversible'? Mario spoke in a firm and clear tone, "when I said irreversible it means Euro can never go back to lira or drachma, it is here to stay for ever!"

Through out the whole Q&A session, he answered many questions on bond purchase and financial aids for the Eurozone, but it is nothing compared to the above statement about Euro dollar sent a very strong signal that whoever think Euro is going to collapse, will need to think twice!

The next day, DJI soared 2% and subsequently other Asian markets rebounded on Monday. Whether this rally genuine or not depends on the following factors:

- Corporate earnings - As we've come to the earnings season in August, what drives the market very much depends on the individual corporate earnings. If economies are recovering, we should see better corporate earnings.

- Economic data - GDP figures from the major countries such as the Eurozone, US, and China will indicate the financial health of the economies that in turn affect the stock markets. So far these figures have been weak, confirming economic slow down globally.

- Government effort - So far since the financial crisis in 2008, governments around the world are the true followers of the Keynesian philosophy, not only that, they went beyond it - they use the last resort of printing money to finance their fiscal stimulus! And amazingly, prices for these money printing countries have been able to keep low. Does that sound like the lost decade- Japan? Remember, inflation arises when people are spending, or when too much money chasing too few goods. Obviously that did not happen or may be not yet because the consumer and business confidence are still weak.

In the end, these governments who spent huge stimulus to artificially shore up the economy will need to reconsider this option. They need to think about these questions:

1. If interest rates are already low, how can we further stimulate the economy with monetary policy?

2. If monetary policy is not working, can we use fiscal policy to stimulate the economy?

3. Then the next question is: How do we finance the additional fiscal spending? By borrowing more money (debt level already high) or by printing more money? Borrowing more money will lead to higher debt level which jeopardise the valuation of the currency and credit rating. How about printing money? Firstly, printing money is inflationary. In addition, printing money will lead to inflationary asset bubble and the depreciation of the currency as well.

Since in the periods of recession, monetary policy generally doesn't work well, the best measure is still fiscal policy. But this has to be finance within your means, and make sure allocation of funds is towards the improvement of labour skills and the efficiency (or productivity) of the work force, rather than constructing white elephants projects or spending money on unnecessary infrastructures that do not drive long term growth for the economy.

Below is the chart of the S&P which shows an ascending triangle is forming, if S&P could break 1400 level, there is a high chance of reaching the next target level of 1500.

KLCI At Historical High

KLCI recorded another record high of 1629! As we can see from the chart above, there was a reverse head and shoulder formed during the period of April to mid June 2012. On June 19th, there was a breakout from this bullish chart pattern and now heading towards the price target of 1646.

While technical analysis tells you the possibility of near term price action, in a larger picture, we still rely on the fundamentals to give us a glimpse into the future.

The Euro debt crisis is still on, the politicians have not come up with the best solution yet. The concern is the bond yield (or the cost of borrowing) for Greece, Span and other debt ridden countries are much higher than their counterparts like Germany, Sweden and Denmark. For example, the 10 yr bond yield for Germany is below 3% while Spain is closed to 7%. It is believed that those debt ridden countries cannot survive with such high cost of borrowing and that they are suggesting the richer EU countries like Germany and Denmark to share the weaker countries debt burden by jointly issuing government bonds. By doing so, the borrowing cost of Spain and Greece is lowered while that of the Germany is raised.

During the recent Brussel Summit in June the above proposal did not materialized but instead a temporary measure is agreed upon. That is the 120 billion euros growth package was agreed upon during the 2 day summit with funding from the ECB to help solve the problem temporary.

In the US, concern is with the unemployment data that remain stubbornly high at above 8% but it is declining which is a good news for the US. In addition, the corporate sector is generating huge profits as products such as Microsoft, Apple, Johnson & Johnson etc are selling all over the world!

On a contrary, things are not looking good in China. Recently the Chinese data shows that the economy is contracting with weaker PMI and GDP data.

Hence we shall expect the markets to remain choppy until the situations get better in the EU and China.

Happy investing,
Pauline Yong

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Where Are We Heading To?

Where is our KLCI heading to?

Everyone is asking this multimillion dollar question!

In order to answer this question, we must first look at the S&P 500 chart, as that will determine our market in the near term. According to the above chart, we are at the cross road whereby the S&P is below the 50 day moving average but was supported by the 200 day moving average. This spells some uncertainty over the market in the short term. Now we have to observe for the next 2 weeks whether we can stay above both 50 day and 200 day moving average, if yes, it means the bull trend continues. However, it S&P 500 breaks below these two moving averages, it means we have the "death cross", which is bad news for our KLCI as well.

Of course, we must not forget the Greece re-election is around the corner, this Sunday, as all eyes will be on the outcome whether the New Democratic Party (New Democracy, in support of the euro zone) and the radical left-wing coalition (Syriza, left-wing, opposed to rescue) will win?

Happy investing,
Pauline Yong

Pay Attention to the Trendllines

What is a trendline?

Trendline is a straight line drawn on a chart through or across the significant limits of any price range to define the trend of market movement.

Trendlines are one of the first technical aspects of the market to be discovered. Technical analysis is based on the fact that the stock prices move in fairly definite trends. Technical analysts use trendlines in two ways: first, to identify the direction of the movement of the stock prices; second, to determine if and when the movement will change.

Uptrends and Downtrends

An “up trendline” is whereby a line is drawn on the chart by connecting the low points of the security as its price continues to rise. Each low point is successively higher than the previous low. This progression gives the trendline its upward slope.

A “down trendline” is drawn with a line on the chart connecting the high points of the security as it continues to fall. Each high point is successively lower than the previous high. This progression gives the trendline its downward slope.

How to use trendlines?

Prices move in trends. Once a trend has been clearly identified, it's likely to continue for a time. Technical analysts look at trendlines for their ability to support price declines or resist price advances.

In addition, the slope of the trendline tells us the strength of the security price. In general, a healthy trendline should be around 45 degrees sloped. The steeper the slope, the more aggressive is the underlying security, however, it may not be sustainable. On the other hand, the flatter the slope, the weaker is the trend and there may be a possible correction in near term.

An Excercise:

Below is our KLCI chart, you may practice your chart reading skill by studying the chart carefully, let's see if you can make a forcast based on the information given. There's no right or wrong answer, it all depends on your forecasting skills. Enjoy!


(Click to enlarge)

The Moon And The Stock Market

Have you heard before that human tends to be emotional during the full moon? The reason why I want to talk about this is because statistically shown that mankind behaves irrationally during these periods and this will affect our decision making process in the financial markets.

A study suggests that a full moon really can bring out the beast in us, turning us into irritable animals.

While we may not actually transform into the bloodthirsty creatures of fables and movies such as An American Werewolf In London, research suggests we do display worrying symptoms.

A study conducted in Australia found that in 2009, 91 emergency patients with violent, acute disturbances were happening in one hospital north of Sydney.

According to the research, "some of these patients attacked the staff like animals, biting, spitting and scratching, and the patients had to be sedated and physically restrained to protect themselves."

Of course we can do another research on the crime rate and the full moon to confirm the above claims. But today I have done a small research on this topic and compare to our Malaysia KLCI and to see whether the moon does affect our stock market.

This research is about the distance of the moon to the earth and how this relationship affect our stock market. It is generally believed that people are more rational when the moon is furthest away from the earth, and the name for this type of moon is called "Apogee Moon". Another extreme case is when the moon is closest to the earth and we can see the moon big and round right infront of us, this type of moon is known as "Perigee Moon". It is this perigee moon that often cause people become emotional, anxious, and pessimistic.

So I did a research on the dates of the perigee moon and marked them on the KLCI chart. (The chart may be unclear but if you click the picture, it will be enlarged.)

Amazingly I discovered that the claim is about 86% accurate that the KLCI did experience local low during the investigating period.

On the other hand, there's a research done by FutureAnalyzer.com, they studied not only the perigee moon, but also the apogee moon (when the moon is furthest away from the earth). They discovered a high correlation between the "highs" and "lows" with the agogee and perigee moon. Most of the time, "highs" happen during apogee and "lows" happen during perigee! In other words, it means that "highs" happen when people are more rational while "lows" happen when people are emotional.

I hope this article is not trying to convince you that astrology is perfect, but just to highlight to you that these little researches help us to look at the stock market in different perspectives.

Happy investing,

Pauline Yong