RISK MANAGEMENT - APPLICATION

Great traders know with mathematical certainty exactly what they are risking.

They define risk to the decimal point. Michael Covel

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Further correction on Bursa looms

THE local stock market suffered heavy losses for a fifth straight week, pressured by rising inflation concerns and mounting political uncertainty after a small Sabah-based party in the ruling Barisan Nasional coalition announced plans for a no-confidence motion against the prime minister. The benchmark Kuala Lumpur Composite Index (KLCI) shed 22.68 points, or 1.8 per cent, to close at 1,206.67 last week, with average daily trading volume dwindling to 425 million shares from 436.9 million in the previous week.

Uneasiness over political developments is one key factor that is affecting the local market apart from worries over the impact of inflationary pressure on consumption, interest rates and corporate earnings growth.

Investors will be keeping their fingers crossed over what transpires in Parliament today. The Sabah Progressive Party (SAPP) cannot table a standalone motion on a no-confidence vote as it has not given sufficient notice. However, there is speculation that the opposition may turn the government's motion on price increases today into a no-confidence vote. It will be tough for the opposition to succeed unless there is a crossover among Barisan MPs. The sooner BN deals with this, the better will it be for the market.

The threat of inflationary pressures will mount in the coming months. The fact that it is cost-push and not demand-pull inflation has given comfort to many nations, allowing them to sit on the fence and watch inflation spiralling upwards to prevent the supply shock from causing a recession. This accommodative approach has come to a tilting point where growth has to be sacrificed to curb inflation by raising interest rates.

In Malaysia, the May 2008 Consumer Price Index (CPI) was already at a 22-month high of 3.8 per cent year-on-year, driven by food & non-alcoholic beverages.

Against the backdrop of rising inflationary pressure, the likelihood of the central bank changing its accommodative monetary stand and increasing the Overnight Policy Rate (OPR) is higher as we move closer to the fourth quarter.

Chances are very high for a negative real interest rate environment with year-to-date CPI of 2.9 per cent inching closer to the current OPR of 3.5 per cent. There is little incentive for depositors to save their money in the banks in a negative real interest rate environment and this may ignite investments into speculative ventures or investments abroad. Disposable income and consumption will take a beating as well. This is not good for domestic-driven economic expansion.

On the global front, the monetary authorities in the US and Europe have indicated inclinations towards raising rates in the near future to combat rising inflationary pressure. The US Federal Reserve is not expected to announce an increase in interest rate come Thursday but market expectations are high for at least a 25-basis point increase to 2.25 per cent in August. If Bank Negara Malaysia maintains its rate and continues to curb any strong appreciation of the ringgit while rest of the world is pursuing a tighter monetary policy and witnessing stronger appreciation in currencies, the outflow of foreign funds into higher yielding assets is inevitable.

We were already witnessing this phenomenon in the last few weeks with heavy bashing of index-linked counters that have high foreign exposure.

Bumiputra-Commerce Holdings Bhd was one of them. On that score, news that it won a bid to acquire a 42.1 per cent interest in the loss making BankThai pcl may have little positive impact on its share price. As for the broader market, the slide is expected to continue this week. Sell call reiterated.

Technical outlook

Stocks staged a technical rebound on Monday, copying strong gains in the region, but buying momentum lacked strength amid negative market breadth. The KLCI rose to a high of 1,241.59 for the week, before falling sharply in the next three days.

The benchmark index dipped to a three-month low of 1,188.5 on Thursday, prior to staging a technical rebound ahead of the weekend. Key index heavyweight utilities, banking and construction stocks led falls, while plantation stocks again cushioned losses.

While the daily slow stochastics indicator for the KLCI flashed a hook-up signal following last Friday's technical rebound, the weekly indicator extended its decline to signal sustained bearish momentum. Similarly, the 14-day Relative Strength Index (RSI) indicator hooked up from the 30-point mark, but the 14-week RSI weakened further to indicate deteriorating momentum.

The daily Moving Average Convergence Divergence (MACD) signal line dug deeper into negative territory, while the weekly MACD trigger line inched lower after hooking downwards from the slower moving average line. The 14-day Directional Movement Index (DMI) trend indicator strengthened its bearish trend signal, with the ADX line rising above the 25-point level to confirm a developing downtrend.

Conclusion

With all momentum and trend indicators for the KLCI still southward bound, save for the daily slow stochastics and 14-day RSI which hooked up following last Friday's technical rebound, investors can expect further downside risk to re-visit major historical lows. The sharp correction in US stocks last Friday, fuelled by a rally in crude oil prices, will aid a slide below the 1,200 level today. Sector-wise, banks, construction and property will continue to suffer from selling pressure given concerns over rising inflation, slowing economy and surging building materials prices.

The decisive breakdown below 1,214, the 61.8 per cent Fibonacci Retracement (FR) of the upswing from the 1,157 low of March 10 to the 1,305 high of April 29 last week, which mirror the pivot low point of June 5, has further negative implications for the KLCI in the short -term. The index is very likely to fall below 1,192, the last significant retracement support of 76.4 per cent FR, which will grease downside to rechallenge the March 10 low of 1,157 this week. A breach below this level will bring down the index to the next significant historical low point of 1,141 seen on August 17 last year. On the flipside, expect immediate resistance to come from 1,214, the previous 61.8 per cent FR support level.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.

AirAsia shares slump

For now, there's no particular reason to buy into airlines, says OSK Research, which has a 'neutral' rating on the stock

AIRASIA Bhd, Southeast Asia's biggest discount carrier, tumbled the most in almost a month amid speculation investors are cutting their holdings on concern rising crude oil prices will erode earnings.

The stock slid 4.5 sen, or 5.2 per cent, to 86.5 sen, the most since May 27, the biggest decliner on the benchmark Composite Index..

Some investors have already reduced their stakes in AirAsia and other airlines. T. Rowe Price Associates Inc said last week it sold 14.5 million shares in the carrier, trimming its holding to 6.2 per cent.

"For now, there's no particular reason to buy into airlines," said Chris Eng, an analyst at OSK Research Sdn Bhd, who has a "neutral" rating on the stock.

AirAsia chief executive officer Datuk Tony Fernandes said last week profitability will be hurt after jet fuel doubled in the past year and a weaker ringgit in the past few months raised its US dollar debt repayments.

Crude oil rebounded from the lowest in a week, climbing 2 per cent to US$134.62 in New York on June 20 and recently traded at US$135.85.

AirAsia has slumped 49 per cent this year, faster than the Composite Index's 18 per cent slide. Malaysian Airline System Bhd, the national carrier, dropped 14 sen, or 4.2 per cent, to RM3.20, headed for the biggest decline since June 4. - Bloomberg

Commodities Roundup: CPO futures mixed

CPO FUTURES

CRUDE palm oil (CPO) futures prices on Bursa Malaysia Derivatives closed mixed yesterday on technical correction after suffering big losses last week, dealers said.

They said the benchmark Sept ’08 contract added RM7 to end at RM3,558 per tonne yesterday although strong external factors saw the crude oil price at over US$137 per barrel mark.

“The market was oversold last week. Today was just a technical correction as the market volume was thin at 4,885 contracts,” a dealer said.

Another dealer said the market was expected to see range-bound trading tomorrow with prices moving between RM3,520 and RM3,600 per tonne.

For the other spot months, July and August ’08 contracts dropped RM2 each to settle at RM3,536 and RM3,543 per tonne respectively while Oct ’08 rose RM10 to settle at RM3,568 per tonne.

Turnover fell to 4,885 contracts from 9,262 contracts last Friday, while open interests were at 44,121 lots, higher from 43,939 lots previously.

As for the physical market, July South increased to RM3,580 per tonne from Friday’s RM3,570 per tonne.

RUBBER

MALAYSIAN rubber prices ended slightly lower yesterday in a quiet manner without much demand from the market, dealers said.

They said the market was easier yesterday as most buyers adopted a wait-and-see approach, waiting for the current prices to drop.

There were no overseas enquiries received today, they added.

However, the strong performance on the Tokyo Commodity Exchange (TOCOM) helped local rubber from dropping further, one of the dealers said, adding that TOCOM normally influenced direction for local rubber.

According to him, local rubber prices are expected to be slightly higher today due to the tight supply conditions in the market.

At noon yesterday, the Malaysian Rubber Board (MRB) official physical price for tyre grade SMR 20 went down two sen to 1020 sen per kg compared with last Friday’s closing of 1,022 sen per kg while latex in bulk dropped half a sen to 709.5 sen per kg.

The unofficial sellers’ closing price for tyre grade SMR 20 added 5.5 sen to 1,023.5 sen per kg from 1,018 sen per kg last Friday and latex in bulk advanced 2.5 sen to 710.5 sen per kg from 708 sen per kg previously.

TIN

THE Kuala Lumpur Tin Market (KLTM) closed sharply higher yesterday, boosted by positive momentum from the London Metal Exchange (LME) as well as good demand for the commodity, dealers said.

The price rose US$400 to end at US$22,850 per tonne while the LME, which influenced global prices, saw the metal tin price also jumped by US$400 to settle at US$22,800 per tonne.

Turnover on the KLTM dropped to 55 tonne from 65 tonnes last Friday.

At the opening, buyers made bids for 114 tonnes while sellers offered only 34 tonnes.

Meanwhile, the price differential between the KLTM and the LME widened to premium of US$425 per tonne compared with US$392 per tonne previously. — Bernama

TRADING MODELS

Make your trading models as simple as possible.

Actually it is very easy to make money when you are used to your trading models.

Once you can follow your trading models, then the sky is the limit.

You will make Soros, Buffet and others as school children :)

2008 - MONTHLY PROFITS - CPO

CRUDE PALM OIL MONTHLY PROFITS - BASED ON 1 LOT

TRADING MODELS USED - 3 INDICATORS

MONTH PROFITS

JAN = RM9375

FEBRUARY = RM10125

MARCH = RM15750

APRIL = RM7900

MAY = RM4475

JUNE = RM6350

PICKING THE FRUITS

I started trading in 1990.

I must say it takes many years to have a disciplined trading system.

I have experienced losing a lot of money, got broke and one thing you learned was who your friends really are.

After being introduced by a friend ( also a trader) about turtle trading I realised how stupid I was.

I also read the market wizards. Actually that book was about ourself. Ironically, all of us behave the same way.

Now I am trading profitabily and without any pressure. I just follow my indicators, indicating buy or sell.

I just follow my MA indicators which I have backtesting for many years.

I can now make an average of RM7,000/mth/lot based on the current market sentiment.

I have learned my lesson very well.

Now is the time for picking the fruits.

RELIABLE TRADING INDICATORS

I have just concluded that the following combinations of Moving Averages are reliable:

1. SMA3
2. SMA4
3. CROSSING OF EMA3.05 AND 3.3

Happy trading and may Allah blesses you all.

GOLDEN RULES OF INVESTMENT

CUT YOUR LOSSES

REVERSE TO NEW POSITION OR STAY OUT AND WAIT FOR NEW INDICATORS

RIDE THE PROFITS