Will the market correct?


THE pace and ferocity of the market recovery has surprised many, myself included, and what started as a bear rally morphed into a rally that on hindsight would have been best described as “yeah, you should have seen that coming”.

Important milestones have been quoted, among them “we recovered to pre-Lehman levels in market prices” as well as “risk and volatility levels are lowest in 10 months.”

Last year’s favourite beaten-to-death phrase “unprecedented” was quickly dropped like last season’s handbag and replaced with this season’s overused “green shoots”.

Green is the new yellow! While I believe there are green shoots, not all will become durian trees or padi; some of the green shoots might turn out to be lalang!

The RM60bil question is: will and when will the market correct, correct, correct? Now that we have established the world is not coming to an end, buyers are coming out of the woodwork but unwilling to pay current prices, praying for a correction. So why is the rally so strong? And why are more investors jumping in even at these prices?

My theory? “Kiasu-ness” from being left out. It’s like seeing a cheap sale and the whole town grabbing stuff at cheap prices. Herd mentality compels you to grab something, even if you do not believe in the quality of cheap sales. The bigger the crowd grows, the greater the nagging doubt on whether you have missed out on something.

Talk about mixed feelings; the rush of a rising market mixed with the trepidation: “What if I am wrong? Ai-ya! Buy first, ask questions and justify later.”

An interesting parallel observation is that half of the stockbrokers’ target prices for the stocks are BELOW the current market prices. Another is that only one stockbroker has a FBM KLCI target that is higher than current market.

I sympathise with analysts because at this stage the market is not fundamentally driven, but instead a result of liquidity sloshing around in the system and pushing up prices. Two months ago, the biggest price performers in the region were beaten down stocks with no visibility in orders beyond a month.

And yet these stock prices doubled and even tripled! Fundamentals? More like funny-mentals or punter-mentals if you ask me. So who is right? And who is wrong? Will all stocks become winners? Will all prices continue to move up with the rest of the liquidity-driven adrenaline rush?

For now, maybe. Most stocks should float on the wave’s momentum. However, when the energy of the waves fade, some will float, others will sink. Those with fundamentals will rise, the fluff will fall.

So is the current rebound for real? Is it a trap for the unwary? Never has there been so much polarity in views. Generally, the strategists are bullish and economists bearish, wringing their hands on a double-dip recession possibility and damage done to the global financial system. To each his own, I say.

For those who can’t stand the risk or volatility, invest in something secure, like deposits or government bonds.

As strategists and economists bicker over the alphabet soup shape of the recovery – U, V, W, N, M, L – what sort of risk should one take? All or nothing in the roulette table? Or be miserly and wait for a sure-thing double bagger? As the saying goes, the only certainty is death and taxes. Everything else has risk.

My expectations are the markets will lurch in fits and starts like a rookie driver, or more aptly a hyper teenager on sugar, bouncing off the walls. As the positive news (or less negative expectations) flows in, the market will jump up; conversely, unexpected negative news will give the market some pause.

This amount of uncertainty is like driving in the rain, with some driving in the middle of two lanes with one foot on the accelerator and the other on the brakes at the same time.

Oi! Get off the road! Others will push pedal to metal through, assuming only the best outcome. Accidents will happen. Last year’s heroes may turn to this year’s zeros.

The low interest rate environment and retreat from risk aversion were the seeds for the rally – as I mentioned earlier this year – and the question now is will the rally stabilise in a “normal” smooth trend that we are conditioned to expect.

Fat hopes, as the law of unintended consequences will see to it that not all outcomes are properly predicted nor anticipated.

Like how squeezing a balloon morphs it into a different and unexpected shape. Or having different chefs (central bankers, finance ministers, presidents) cooking with the same ingredients (monetary, fiscal and government policy). The dish will invariably turn out slightly different depending on the chef.

There is always enough variation that nothing is ever the same every time. That’s what makes a market sooo ... interesting – there is something new everyday. There will always be new tricks this old dog (me) can learn.

So will the market correct, correct, correct? When will the correction end? To what level will it correct? Should one buy now? Should one sell now?

In a liquidity driven market, the likelihood is that the market would trend higher before it corrects, and the low of the correction could well be higher than current prices.

Where will the top be before the market corrects? The way the market blew past 1,000 and 1,100 points makes it very likely it will blow past 1,200 points as well.

Fear of losing money has transformed to fear of not making money and greed of making more. And with emotions driving your investment strategy, accidents will happen. Correct?

·Raymond Tang is chief investment officer with CIMB-Principal Asset Management Bhd. Readers’ feedback is welcome. Please email to starbiz@thestar.com.my For latest Bursa Malaysia indices, charts and other information click here

For latest Bursa Malaysia indices, charts and other information click here

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