KLCI: Pre-Election Dip

On the last trading day before the long-waited general election, the local index took a dive and broke the 1700 psychological support. The index moved down by as much as 28 points before recovering by around 10 points to close at 1694.77. This came after a divergence in the true sentiment of the market with the index movement (one of many of the signals under Sentiment Analysis) appeared on the 30th of April, sending strong signal of bearishness.

klci (4)
Throughout the whole trading day, futures are traded at a discount to the cash market. At the close, the gap between the two even widen, with the spot month contract closed at a 15-points discount to the cash market. This shows that the market participants are expecting the index to fall further in the coming weeks or they are generally uncertain of the future movement of the index. With such an expectation in hand, we could reasonably expect the broad market to perform badly in the coming weeks, and the “Sell in May” strategy may just work in protecting one’s portfolio.

Moving on, with the 1700 psychological support breached, our index is expected to undergo a healthy correction. The magnitude of this correction is highly dependent on the result of the upcoming election. If PR manage to win the election, the temporary political instability could possibly pull our index down to the 1600 again, giving traders and investors a good opportunity to buy. Otherwise, the index is expected to move gradually (or frantically) towards the major supports levels (1680, 1660 and 1645) before rebounding to greater heights.

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