Technical Correction at KLCI today

On the 27th, the stock market tumbles.

Shanghai bourses lost 8.84% and China Shenzhen lost 8.54%. Korean Kospi was down 1.05%, Singapore STI was down 2.29% and Malaysia’s KLCI was down only 2.81%.

There was still much confidence in the stock market as KLCI seems to be on a correction phase after the hikes over the previous few weeks. The correction was expected and should stabilize within a short period. It was predicted that China's market is facing tremendous influx of hot money from the hedge funds and in fact the central bank had warned of the bubble.

Similarly, Zarinah Anwar, the then new chief of Security Commission on also warned of the possible manipulation of the local capital market conditions. For whatever reason, the Security Commission then decided to allow short-selling which was curtailed previously to mitigate the possible influx of hot-money. The decision to relax the rules on short-selling must have been politically motivated in order to boost the stock market trading volumes and gives us some signs of better economic activities. To me, it was a political decision and ultimately, we would have to pay the price.

Sure enough, since 28th Feb 2007, the stock market had lost some RM130bil in market capitalization largely due to the cashing out by the hedge funders and foreign fund management's strategic profit-taking.

Unfortunately, we are not seeing the danger and what is more alarming is the fact that Prime Minister Pak Lah had urged Malaysian investors to boost the KLCI to 1,300 index points. The GLCs and political counters saw a surged in the buying, only to have given the foreign funders the opportunity to cash-out at a high price. Who were the losers? It was observed that the local market managers and the GLCs, probably include EPF were the major buyer at the wrong time.

Though the market made a correction of some 5%, we did not anticipate that over the last few days it went on to further shrinked by another 8%, taking the total correction to some 13%, the highest as compared to the regional bourses.

What a lessons to be learnt.

Would we see the rebound soon? Unfortunately, the signs ain't too good.

The only consolation is that our stock market rebounded 1.8 percent today, lifted by bargain-hunting by foreign funds. The KLCI rose 20 points to close at 1,130.96 (about 2%) after falling 4.6% yesterday. Is this a technical correction or will the market dipped further? The next few days will tell.

However, Prime Minister Pak Lah blamed the recent plunge as reflective of the global uncertainty, and is not an indication of a weakening local economy.

Mr PM, I hope you are right.