Saturday, February 2, 2013

Hey! What’s up with KLCI?

Just after some announcement made by our beloved PM Ah Jib kor regarding the 13th General Election, the KLCI started to react like mad. From the high point of 1676.44 on 18th Jan, declined sharply to 1628.66 on 22nd Jan. Yesterday, 1st Feb, it closed at 1627.55. What happened?

Actually, I was just surprised with the sharp drop when I checked the index on 18th Jan, without knowing the reason. I went to the Investalks forum and try to find out what’s the story behind. Due to time constraint, I simply read through, and found out it was regarding the announcement of 13th GE. Ah Jib kor didn’t really announce the exact date, but he mentioned it’s almost there.

Why is the announcement such an impact?

What was being the real reason for this declination? Sentimental. People reacted upon the announcement. Meanwhile, KLCI has also achieved the highest point in the history. Or people tend to call it as “bubble”. Bubble might explode when it is getting bigger and bigger, and the surface tension is not enough to support the strength of the debonding molecules, then “pop!” Well, it’s about physics here. But, whatever, bubble explodes when it gets too big.

Translating it into more physical meaning, people scare of getting trapped in the high price stock. Many stocks are overvalued. The companies are not earning of what the price reflects. The PE ratio is too high, for most of the company. Therefore, many people call for “sell!” Some of them might have bought the stocks when the price was undervalued, or very low. Then, they earned enough and sell them. This is typical strategy of “buy low sell high”.

When there’s people selling, there must be buyers in order to make the trade counted. Therefore, when buyers are buying at the price of sellers, trade done! But, what happen when the sellers decide to sell at relatively lower price than the market price?

Calling for sell at lower price

Imagine in a night market, pasar malam, two stalls are selling the thing, let’s say milk. The market price of the milk is RM2.00. But, because of some rumours heard that some of the milk is using the bad ingredient, the stalls are panicked. They starts to sell it at lower price. Stall A calls for RM1.80. Stall B calls for RM1.90. People will definitely buy from Stall A. Stall B is worried that he can’t finish selling his milk, so he tends to sell it at RM1.80. That’s how the market price comes down from RM2.00 to RM1.80.

Same things apply in stock market, where every stock owner is also the seller. People get panicked. When one seller starts to call for lower price, people tends to buy. That makes the deal easily done. When the market price is affected by one deal, more and more people are panicked because of the price drop. They are scared they will be trapped in the stock, so they start to sell too! At all cost, they sell whichever the price is losing the least for them.

With this, more sellers are following the trend, and thus some of the stocks having sharp drop in price, especially those popular stocks, which might be one of the 30 companies taking part in measuring the KLCI.

In short, when number of sellers is more than that of buyers, price starts to drop. That’s one of the principles of economy. Supply more than demand, price drops. KLCI drops.

GE announcement link to KLCI

Many people think that GE is related to the KLCI. Here’s how it is related.Many politicians are trying to earn money from the stock markets. Therefore, when GE announcement is made, those politicians start to sell their stocks, asking for the price whichever they can earn the profit. For liquidity purpose, they sell at the lower price.

Because most of the case, they are doing so at large volume. Therefore, it affects much on the price. That’s how they triggered the KLCI shock moment.

Another reason is, this GE is making a huge impact on Malaysia’s future. Will it change the government? From the current BN to Pakatan Rakyat? If it changes, a lot of uncertainties in the market will happen, thus people are worried. If it doesn’t, many people are not going to see any breakthrough by the current government. They are still worried. Either way are worries, that’s how it affect the KLCI.

What if, all of the above are not true? They are just the reasons coming out by people, and most of the people agree on it? Yes, because of the internet, the advanced telecommunication technologies, information spreads around easily. One false thing can be true when everyone agrees. That’s how KLCI is affected too.

Back to the Fundamental of the Companies

So, no matter what happen. KLCI is just an index, which doesn’t really represent the whole market. It can only be short term correction, it wouldn’t last long. It is not representing the performance of each particular company.

What we are investing is a company, not the whole market. What we need to understand is the fundamental performance of the company, instead of how the KLCI performs in Malaysia.

We need to understand the market of the industry of our invested company, like Vitrox is from semiconductor, CSCStel is from steel market, Asiabio is from pharmaceutical, Gtronic is also from semiconductor and LED. Instead of knowing the KLCI market, which is the composite index of all different markets and companies, we should read deeply on each specific market.

Analyse Fundamentally, don’t follow trend.

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