Business

Monday October 6, 2008

Hedge funds could trigger more turmoil in the markets


They are expected to dump huge amounts of stock holding

Stock Market Signals: A weekly column on the Main Board of the MSEB by G.M. Teoh

THE KL Composite Index (KLCI) recovered almost all its earlier sell-off losses caused by the meltdown on Dow Jones and finished the week with slight losses.

Optimism that the US bailout package would eventually be signed into law attracted light bargain-hunting on most key index-linked stocks and triggered a strong technical rebound.

The KLCI rebounded from an intra-week low of 993.60 points and set a week’s high of 1,023.18 points before easing slightly to end the week slightly lower at 1,017.70, down 3.83 points or 0.37% from a week earlier.

The main key index-linked stocks managed to recover a good portion of their earlier sell-off losses and closed the week mixed.

Public Bank, Tenaga Nasional, Commerce, Genting, PLUS Expressways, Telekom and British American Tobacco finished with small gains and contributed a combined 5.10 points to the KLCI.

Maybank, MISC, IOI Corp, TM International, Petronas Gas, DiGi.Com and KL Kepong closed with minor losses and erased a total 10.55 points from the index.

Volume for the three-day trading week fell to 472.4 million compared with 836.10 million shares the week before. The daily average volume dropped to 157.34 million from 167.22 million shares.

The weekly candlestick chart closed neutral to slightly positive and called for further sideways band trading this week. A candle with a long lower-shadow was formed in the weekly chart last week and this positive development usually is followed by more upward trading actions.

On Friday, the Dow Jones declined over 100 points despite the approval of the bailout bill by the US House of Representatives. The situation would likely get worse before it gets better. From this point, there would be plenty of “calm-before-the-storm” scenarios. People would look to sell on rallies and would buy back shares when they get cheaper.

Don’t be lulled into buying shares because there is a bounce in markets where some losses were recouped or buying because there are stories of billionaires like Warren Buffet moving in and cherry-pick opportunities. This is not the stock market for the faint hearted. Period. This is going to be ugly for months, if not longer. Here is why.

Another massive worldwide meltdown looms despite the US government ability’s to mount a rescue package. Huge market losses might occur because the deadline for US hedge funds’ redemption request for Dec 31 withdrawal that ended on Sept 30 would lead to the dumping of massive amounts of stock holdings.

Some US fund managers have already begun selling stocks to raise cash to refund money to investors. If the redemption request for Dec 31 withdrawal is higher than expected, there could be major disruption in the US markets in the fourth quarter.

The US hedge fund industry is worth US$2 trillion and dumping stocks into this type of market is going to hurt the funds and their investors even more. Many funds may also end up out of business.

Ironically, hedge funds and mutual funds may be dumping their best stocks and keeping their worst to meet redemption requirements. This is what happened in the meltdown of 1987 when portfolio managers sold their best into a downward spiral and caused the crash.

The daily chart shows an immediate chart hurdle at 1,025—1,035 points. A successful break above these levels could set the stage for a test of the minor resistance at 1,040—1,050.

Chart support for this week is revised slightly lower to the 1,005—990 points. The main trend is deemed to be bearish again if these levels are violated.

The daily technical indicators finished the week bearish and signalled the underlying strength of the index is still weak.

The daily stochastic gave the short-term buy signal on Sept 30 and remained positive for the immediate trend at Friday’s close. The oscillators per cent K and D closed lower at 57.95% and 45.35% respectively.

The daily Money Flow Index (MFI) rebounded strongly and ended higher in the oversold territory at 24.33 points. Analysis of the daily MFI indicates moderate accumulation occurred last week.

The main trend tracker, the 3- and 7-week exponentially smoothed moving-average price lines (ESA-lines), again ended the week in bearish divergence and signalled the main trend remained the same. The short-term trend tracker, the 3- and 7-day ESA-lines, held on to their sell signal at Friday’s close and continued to show the immediate-term trend was still negative.

The 5-day RSI trended lower last week and settled in the negative zone at 35.35 points. Analysis of the RSI shows the immediate underlying strength of the index is bearish.


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