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Trading in 2012 is going to be volatile, illiquid and frustrating however we will see plenty of opportunities for the Investor and The Speculator. Investors should first decide how they plan to approach the market and how they plan to segment their portfolios
Outlook, advice and opportunities for 2012
The typical bear market (while some are not distinctive in nature), usually has three separate legs of decline interrupted by a couple of rallies that last long enough to convince investors to keep buying. Some rallies last 15 weeks, however most of the time they don’t last that long. Large investors may also join the game and look to convince the entire market that the new bull market has began.
Trading in 2012 is going to be volatile, illiquid and frustrating however we will see plenty of opportunities for the Investor and The Speculator. Investors should first decide how they plan to approach the market and how they plan to segment their portfolios. This is critical as the two types of trading strategies and investment philosophies will offer varying degree of prospects and if not strategized initially, can cause confusion leading to losses.
First let’s evaluate the liquidity in the market. In 2011 there has been a net outflow of funds amounting close to LKR 18 billion. There have been a number of private placements and IPO’S where funds of disappointed investors are now stuck. According to a broker pole Investors big and small are also facing losses amounting to 30% on average. This along with the rising cost of margin facilities has sucked the liquidity out of the system.
Brokers who are in need for speed
The Colombo Stock Brokers Association (CSBA) has requested the government for three measures to help provide liquidity for the market. 1. To increase bank lending to the equity
markets from 5% to 7% 2. Eliminate price bands 3. Enable brokers to extend credit to clients by 3 times The first demand was met over and above expectation as the Central Bank imposed an unlimited cap on bank lending to the equity markets. However when announced this did not provide any support for the markets. This is mainly due to the fact that A. Clients are underwater and do not want to borrow more in an unpredictable market. B. Banks whose margins are getting squeezed on the interest rate front might not l end more to the equity markets. Furthermore there remains over LKR 2 billion in unutilized funds available for l ending, however even brokers are not willing to lend this out to clients. Therefore there might be no further increase on this front. The few brokers who are in dire straits for these funds will find themselves with mounting debt and difficulty in sustaining themselves next year. We therefore advise clients to stay with reputable long trusted names in the business.
Market review and outlook: Technical view of 2011
The spread between the ASPI and MPI is currently around 16%, whereas over the last 10 years the highest spread has been over 40%. The MPI is at present the leading indicator for markets and a change in trend would have to be first witnessed in the larger capitalized stocks which presently have long term value. Evaluating the liquidity in this index would be an important indicator to note the change in direction of the market. Currently the MPI is consolidating between 5,000 and 4,800 its 38.2% and 50% Fibonacci retracement levels (Please see Chart A). However if the MPI is unable to hold these levels we could see it drift down towards its 200 day weekly moving average which is at 4,300 (Chart A).
Technically the ASPI (See Chart B) is overvalued compared to the MPI as it has been trading based on a few counters comprised in the Bartleet Speculator Index (BSI). Therefore even though we could get a January rally in the ASPI, ultimately we would want to see a consolidation and narrowing of the spread between the indices. As we had witnessed in 2008/2009 the merging of both indices is an indicator of the market bottoming out, whereas a widening of the spread indicates that the market can move lower.
The ASPI (See Chart B) is currently hugging on to its 100-day weekly moving average at around the 6,000 level. We could see this index trade down towards 5,400 and 5,000 within the course of this year. We will look to evaluate the direction of the market at this consolidation point.
Global markets Vs. ASPI
The global markets have had a volatile year on average down 10% to 20%, while the US markets have been one of the best performing markets ending the year flat, compared to a loss of 9% on the ASPI. Compared to the Emerging Markets ETF (EEM), the ASPI outperformed the index by 13%. When evaluated on a PE multiple basis the ASPI remains comparatively over priced (Please see Diagram A). Whereas on a market capitalization to GDP basis Sri Lanka has slipped back down to 26% compared to 46% last year. While this is somewhat aligned with developing nations it is far smaller in comparison to developed Asian markets which are all over market cap to GDP well over a 100%. This demonstrates that our equity markets have the potential to grow fourfold at the very least over the next decade.
Summary: Diamonds in the rough
The outlook and scenarios we have discussed do not paint an extremely healthy picture for the short to medium term but they also do not forecast a drastic bear market either. Sri Lanka is a frontier market and the long term potential is seen across the country. This leaves cash rich investors/speculators with great opportunities for the short and long haul in 2012. As trading will be hard this year we thus advise investors to continue to manage their risk. The investor who protects his capital and managers his risk on his investments will hold the diamonds at the end of the tunnel.
“When you make a mistake in the stock market, the only sound thing to do is to correct it. Don’t fight it; Pride and ego never pay off, neither does vacillation when losses start to show up” William O’neil
Daily Mirror (Sri Lanka)
BY STEFAN JURIANZ ( The writer is a technical analyst attached to Bartleet Religare Securities)
Outlook, advice and opportunities for 2012
The typical bear market (while some are not distinctive in nature), usually has three separate legs of decline interrupted by a couple of rallies that last long enough to convince investors to keep buying. Some rallies last 15 weeks, however most of the time they don’t last that long. Large investors may also join the game and look to convince the entire market that the new bull market has began.
Trading in 2012 is going to be volatile, illiquid and frustrating however we will see plenty of opportunities for the Investor and The Speculator. Investors should first decide how they plan to approach the market and how they plan to segment their portfolios. This is critical as the two types of trading strategies and investment philosophies will offer varying degree of prospects and if not strategized initially, can cause confusion leading to losses.
First let’s evaluate the liquidity in the market. In 2011 there has been a net outflow of funds amounting close to LKR 18 billion. There have been a number of private placements and IPO’S where funds of disappointed investors are now stuck. According to a broker pole Investors big and small are also facing losses amounting to 30% on average. This along with the rising cost of margin facilities has sucked the liquidity out of the system.
Brokers who are in need for speed
The Colombo Stock Brokers Association (CSBA) has requested the government for three measures to help provide liquidity for the market. 1. To increase bank lending to the equity
markets from 5% to 7% 2. Eliminate price bands 3. Enable brokers to extend credit to clients by 3 times The first demand was met over and above expectation as the Central Bank imposed an unlimited cap on bank lending to the equity markets. However when announced this did not provide any support for the markets. This is mainly due to the fact that A. Clients are underwater and do not want to borrow more in an unpredictable market. B. Banks whose margins are getting squeezed on the interest rate front might not l end more to the equity markets. Furthermore there remains over LKR 2 billion in unutilized funds available for l ending, however even brokers are not willing to lend this out to clients. Therefore there might be no further increase on this front. The few brokers who are in dire straits for these funds will find themselves with mounting debt and difficulty in sustaining themselves next year. We therefore advise clients to stay with reputable long trusted names in the business.
Market review and outlook: Technical view of 2011
The spread between the ASPI and MPI is currently around 16%, whereas over the last 10 years the highest spread has been over 40%. The MPI is at present the leading indicator for markets and a change in trend would have to be first witnessed in the larger capitalized stocks which presently have long term value. Evaluating the liquidity in this index would be an important indicator to note the change in direction of the market. Currently the MPI is consolidating between 5,000 and 4,800 its 38.2% and 50% Fibonacci retracement levels (Please see Chart A). However if the MPI is unable to hold these levels we could see it drift down towards its 200 day weekly moving average which is at 4,300 (Chart A).
Technically the ASPI (See Chart B) is overvalued compared to the MPI as it has been trading based on a few counters comprised in the Bartleet Speculator Index (BSI). Therefore even though we could get a January rally in the ASPI, ultimately we would want to see a consolidation and narrowing of the spread between the indices. As we had witnessed in 2008/2009 the merging of both indices is an indicator of the market bottoming out, whereas a widening of the spread indicates that the market can move lower.
The ASPI (See Chart B) is currently hugging on to its 100-day weekly moving average at around the 6,000 level. We could see this index trade down towards 5,400 and 5,000 within the course of this year. We will look to evaluate the direction of the market at this consolidation point.
Global markets Vs. ASPI
The global markets have had a volatile year on average down 10% to 20%, while the US markets have been one of the best performing markets ending the year flat, compared to a loss of 9% on the ASPI. Compared to the Emerging Markets ETF (EEM), the ASPI outperformed the index by 13%. When evaluated on a PE multiple basis the ASPI remains comparatively over priced (Please see Diagram A). Whereas on a market capitalization to GDP basis Sri Lanka has slipped back down to 26% compared to 46% last year. While this is somewhat aligned with developing nations it is far smaller in comparison to developed Asian markets which are all over market cap to GDP well over a 100%. This demonstrates that our equity markets have the potential to grow fourfold at the very least over the next decade.
Summary: Diamonds in the rough
The outlook and scenarios we have discussed do not paint an extremely healthy picture for the short to medium term but they also do not forecast a drastic bear market either. Sri Lanka is a frontier market and the long term potential is seen across the country. This leaves cash rich investors/speculators with great opportunities for the short and long haul in 2012. As trading will be hard this year we thus advise investors to continue to manage their risk. The investor who protects his capital and managers his risk on his investments will hold the diamonds at the end of the tunnel.
“When you make a mistake in the stock market, the only sound thing to do is to correct it. Don’t fight it; Pride and ego never pay off, neither does vacillation when losses start to show up” William O’neil
Daily Mirror (Sri Lanka)
BY STEFAN JURIANZ ( The writer is a technical analyst attached to Bartleet Religare Securities)
