Sunday, August 14, 2011

Stock Crash

In the recent stock crash, he DJI had an unprecedented wild ride initiated on August 4th a crash of 512 points (4%)due to a downgrade of its long term debt by Standard and Poors. On August 8th, DJI shed another 635 points (5.5%) but on August 9th, DJI had a big jump of 430 points (4%), however, on August 10th DJI swung negatively by 562 (5%)points due to rumours that a French Bank might be in financial distress. As predicted, the next day a big swing to the positive side by adding 424 (4%)points.

In 6 trading days, 5 days had more than 400 points (or 4%) move! That was unprecedented and it definitely affected the stock markets around the world. Our KLCI had a sharp fall but compared to the regional markets, as usual, we dropped the least. But still, the damage was done to our stock market technically, as our KLCI is now trading below 200 day moving average, it could signify the beginning of a long term bear. By long term bear I mean 9 months - 1.5 yrs based on the past trends.

Currently, I can see an intense fight between the bull and the bear. Last week's event was a first sign of fear that the investors express it on the stock market after a 2 year bull run. Let's think objectively: (1) Have we seen any default yet by any of the U.S. or the European debt ridden countries? (2)The property market in Asia is looming but has it burst? (3) Interest rates around the world are considered low as we just recovered from a recession 2 years ago, so that's good for the stock markets, right? So what hasctriggered the crash on August 4th?

Some said it could be some political motive by the supporters of the Republican that they want to teach Obama a lesson by having a stock crash on his birthday. It's not uncommon to have this thought because the recent debt ceiling negotiations between the Democrats and the Republicans have exposed the weakness in the Obama's administration. Investors feel that Obama may not be able to handle well the current economic problems the Americans are facing, and that would hurt the U.S. economy which in turns affects the stock market negatively.

So the recent stock market crash has clearly send out a strong signal to the world that the investors do not have the confidence that the Obama administration can resolve its economic problems well, their historically high debt level may raise the risk of default by the U.S. government. Even without a default, the country is facing inflation problem and the depreciation of the US dollar may give havoc to the rest of the world.

For one, China would be in trouble since they are the largest holder of the American debt with more than US$1 trillion. And many central banks around the world will see their foreign reserves depreciate as the dollar depreciates.

In addition, the European countires like Greece, Spain, Portuggal and more seemed not committed in cutting their fiscal (government) spending, as they are afraid of losing the popular votes. So in the next 2 years, It won't be a surprise if I see defaults in governments in these countries.

So what to invest? I'm still saying the same old words: For short term investors, go ahead and take advantage of the market volatility, as for the long term investors stay away and wait patiently!

Happy investing!

Pauline Yong

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