Elections and its effects....

I believe everyone is preparing for this. Elections, not only inside the market but also outside. What could be the political change that may affect businesses, lifestyle and maybe culture? However, what i'm writing today would be more on the concerns on the Malaysian market. As of today, the market is running a really strong bull run. Of course it would. The higher it goes, the higher they can SELL it down right? With the elections coming in, i am very much bearish and i have missed probably almost the entire bull run this round. 

In the past history when the elections was held, after a major market correction, the market rallied to historical highs in three to five years. During the years 1990, 1995 and 1999, the election was held after a major correction occured. KLCI performance patterns in 1990 and 1995 look identical as there were small rallies after the election which then pulled back to pave the way for a bigger bull run. However, 1999 the index rallied after the election, climbing 40% in three months.

In 2004 and 2009, the index was at multi year highs and after the election, the market fell nearly 20% in two to three months before it rebounded and rallied into an uptrend again. The extent of the decline in 2008 was more severe because of the US financial crisis whereas in 2004 the pullback was less but still significant at 14% before it started to be bullish again.

Now in 2013 the KLCI chart pattern is similar to that of 2008’s, reflecting the formation of a classical head and shoulders chart pattern.

In 2008 the index fell about 18% in about a month before it rebounded. But the US financial crisis brought the market lower later. The target for the head and shoulders pattern breaking below the neckline at 1350 points was 840 points and the index did fall to this low in Nov 2008.

In 2013, the head and shoulders is currently (March 2013) forming with the neckline at 1600 points. A break below this neckline would confirm the head and shoulders pattern which has a target of 1490 points, a 6% decline from 1600 points.

With the head and shoulders pattern forming and the GE going to be held anytime soon, the chances of the KLCI moving into a correction are high, especially if the index breaks below the 1600 points.

The index may see falling to 1490 points within two months. The pattern was almost similar during the 1990 and 1995 election years and therefore there is a chance that 2008 and 2013 might also be the same.

However, bear in mind that a strong bullish market follows after a correction but as of now, with elections drawing near, i'm gearing up for the bears. Having said that, since the flow of money is still coming in, i would ride the bull first but be aware of the bears and IF after the elections and BN wins, i will go LONG all the way. If not, then SHORT all the way. My heart is with the rakyat, but my money follows the market. :p