You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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After the Despair, Then What?

Last August, precisely August 24, 2015 when the Jakarta Composite Index (JCI) dropped 4% in a single day and closed at 4,164, and triggered a moment of panic selling, I wrote an article entitled Between Euphoria and Despair. In the article I presented several phase of the period of bear market, namely denial, bull trap, return to ‘normal’, fear, capitulation, and finally, despair. And by referring to the fact that JCI had tumbled significantly from its peak, ie 5,500’s until reached 4,100’s, and also has passed through several phases ranging from denial to fear (or capitulation), then at the end of the article, I ask, are we in the phase of despair yet?

Because, considering that the phase of despair is a bottom or lowest point of the period of bear market, then if JCI has reached this phase, it will subsequently, slowly but surely, rise again.

And after a few months, the JCI went up and now it is in 4,500’s. So maybe the question is still the same: When the stock index was in 4,100’s last August, is it its bottom? And if the answer is yes, then what’s next? Well, to answer that question, then you can see again the picture below, which shows the phases in the period bear market, and also bull market (click image to enlarge). Btw, the picture is not mine so you can check the original source at the bottom of the picture.



Now, take a look at the far right of the picture above: One of the characteristics that the market/JCI has met its despair phase, is if the stock index itself rose significantly until it return to the mean or average position, after falling steadily before. Yup, so if we want to know when the JCI has reached its despair simply by looking at the charts, aka using the technical analysis only, then you will only know after the despair occurred, ie, after the JCI rose back. I mean, if today the JCI is still in a position lower than the 4,164 of last August, then you can not say that 'We are now in the phase of despair!'.

For example, on September 28, 2015 ago, or a month after the panic selling of August, the JCI dropped once again and closed at 4,120, or lower than 4,164 in August. So until the end of September, we still could not say that the market has reached its lowest point, we don’t know it yet.

However, after that September the JCI did not reach a further low, and today it is already in 4,500’s aka has risen high enough, but still below its mean (if we use line of MA200, aka moving average of one year as the mean). So, in a technical standing point, JCI may have reached its phase despair in last September, and today it is in a phase of consolidation. We call it consolidation because the decrease has been slowed down (JCI could still go down at any time, but without drop of more than 2% in a day), the selling pressure eased, but on the other hand the JCI has not significantly going up.

Consolidation phase is not part of bear or bull market period, and therefore can lead into two possibilities: JCI tumbled once again to a position of new low, which means that we have not yet reached the phase of despair, or contrary, JCI continue to rise until it go through its mean, which means that, in technical standpoint, the bear market period is over (by the way we use moving average of one year as mean, because we assume that if the bear market period is over, we may buy stock and then hold it for at least one year ahead). When this article was written, the mean line of JCI is at 4,785.

Fundamental Analysis of JCI

But if we only start buying stocks after the JCI go up through 4,785, doesn’t it mean that we’re too late? Well, at this point, we must go back to fundamental analysis, in this case the domestic macro-economic analysis. And here are some simple facts: First, after the Rupiah exchange rate stable at Rp13,500 – 14,000 per USD, nobody talks about the crisis, because on the other side the economic conditions in the country also began to improve. If you remember, in last September everyone said that the impairment of Rupiah could possibly lead to a monetary crisis like in 1998, but in this article I said that there will be no crisis. And indeed, there was no crisis, and the rate of economic growth in the third quarter was 4.73%, or improved compared to the previous quarter which is only 4.67%.

Second, in the last two years, in order to reduce inflation as a consequence from the rising price of fuel, etc. (as the Government revoke the subsidy), Bank Indonesia (BI) continues to raise the BI Rate to current position of 7.50%, and most investors do not like it, where they expect that the BI Rate remains in a low level, which could help to to boost the economic growth. The good news, the latest data show that inflation for the month of December 2015 was only 3.5% year on year, and this may allow the central bank to lower the BI Rate sooner or later. And when the Rate go down, it will be responded positively by the market.

And third, as well as, most importantly, the performance of listed banks in the third quarter of 2015, in general have been better than the previous quarter (second quarter), and this is a signal of economic recovery. And if the economy starts to recover, the composite index will automatically follow.

So taking into account the above factors, the phase of consolidation that is currently happening in JCI is likely to lead to.. a beginning of a bull market, of course. Look again at the picture above: Long before the JCI enter a period of bull market (marked by a phase of media attention), and even when the JCI itself is still below its mean, some ‘smart money’ decided to buy stocks before the others, of course at a lower purchase price. This type of investors, though they arguably take the risk because they buying stocks when the index is still in a consolidation phase (which means that the it could turn down again), but they were bold enough because they can see that, taking into account the company's fundamentals, sectoral conditions, as well as the national macroeconomic, all of which showed improvement, so there is no way the JCI will record a new low. In this condition, investors who understand the fundamentals will generate much larger profit, than those who rely on technical analysis and only waiting for JCI to break out first.

(And, by the way, the same condition also applies when the market will go down. In March 2015, when the JCI is still at the level of 5,400's and continued to rise, I have said in this article that there is a problem with our economy, and that JCI willl eventually going down in line the detoriated fundamentals of the national economy. But because, in technical standing point, the JCI still shows a pattern of an uptrend, almost no one is thinking of selling except a small number of investors who aware about the economic conditions. When the JCI eventually dropped at the end of April, only then the crowd all poured out of the market, but it is too late).

Back to 2016. So uh, okay, are you saying that the JCI will go up? But what about the stock market crash in China? Yuan devaluation? Well, that’s an old story mate! There is no crisis in China, and we've been discussed it over here, and here. The point is, as long as the ‘commotions’ in China or America do not have a negative impact on domestic economic fundamentals, and there is no negative effects whatsoever, the composite index would be just fine. I mean, if the current economic conditions are like in 1998 or 2008, I will not be as optimistic as today (crisis of 1998 was preceded by Thailand, and the crisis of 2008 preceded by the United States. While in 2011, the Greece was in a crisis, but it had no any impact to Indonesia). But yeah, just try to look around you: What crisis? Hellooo crisis, where are you???

And if the JCI will actually rise sooner or later, then like I said in here, the stock picks will be from the sectors of banking, infrastructure, and property, because only these sectors which have good sentiment for 2016 related to the continuation of the development of infrastructure etc., plus their financial performance is quite good. If you notice, some of the stocks in the above sectors have started moving up in recent weeks, but considering their fundamentals and the still low valuation, then they could rise further.

Nevertheless, nobody could predict the market precisely. So if later there is fundamental changes in the economy and the market, I will update the analysis, just stay tune.

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com

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