Between Euphoria and Despair

Whenever the Jakarta Composite Index (JCI) dropped significantly to a panic level, I usually write a ‘counseling’ article to calm down the investors. However, starting from this year I will probably let the panic happens, because based on experience, panic is a normal part of the cycle that occurs in the stock market. I mean, even if you are desperately trying to calm down the markets, the people will still throw everthing out because once again, it is a normal part of a stock market cycle.

On the contrary, in a state where the JCI is at its peak, even if you say that the stock index will fall by exposing economic data and facts that show it, but people will only assume that you are only spreading ‘bad rumors’. In March, when the index was still stood at 5,300's and keep breaking a new high while the economy began to slowing down, in this article I warned the investors that JCI will eventually go down. And although some readers agree with the article, but some others denied it.

In short, when the euphoria happens then just let it be, because there is nothing you could do. Conversely when the people are in a state of panic and despair, then you will not be able to calm down them all, and sometimes all you have to do is to calm down yourself.

These days, as you already know, the stock market is in another bear period, so perhaps today is a good time to discuss the topic ‘Euphoria vs. Despair’. Based on my research, although stock index has been dropped since the end of last April or four months ago, but only today people started to panic and pessimistic and the bad news about crisis etc has been spread everywhere, and the exchange rate of Rupiah is now as low as Rp14,000 per US Dollar. Okay, here we go!

Understanding the ‘Market Cycle’

In general, there are four conditions that can occur in a stock index including JCI: 1. Moving up, 2. Reaching the top position, 3. Turn around and moving down, 4. Reaching the bottom, then back again to the condition No. 1. The decrease of JCI is usually faster than the increase. See the following picture:

The picture above is actually describing the market cycle as a whole, but let's focus on the phase in which JCI began to fall, the ‘new paradigm’. Back in 2007, when the JCI was in a very high position-high after gaining a total of nearly three-fold in less than four years, everyone is optimistic and there is a new paradigm that ‘Indonesia will become a developed countries’, so that ‘the high position of JCI, although seen as a bubble, but it is still reasonable because it reflects the bright future of the nation!’

But a year later, JCI fell down and shattered.

Well, for this 2015, when the stock index was in its peak in early April, there’s no story about the ‘new paradigm’ or such, but back then the people were still not aware that there are some problems with the national economy. When JCI began to fall from 5,400’s to 5,100’s, two weeks later, some people started to realize that the position of the stock index wasn’t represent the current economic conditions, but some other rejected the idea that the JCI was began to fall (denial), by insisted that the economy is still in a good shape. Yep, these people were actually said it.

Entering May, the JCI turned out to rebound quickly (bull trap) and successfully returned to 5,300’s, so that investors began to think that the stock market will not go down any further (return to ‘normal’). More details can be seen from the following picture, click image to enlarge:

Okay, next. After there phase of return to ‘normal’, JCI dropped once again, and this time there is no longer a bull trap, so that investors began to fear. The stock index would continue to fall until reaching a condition where investors begin to give up in the pursuit of profit and think that, ‘Just try not to lose any money!’ (capitulation). The culmination of these conditions is when everyone is desperate (despair), and started to think that invest in stocks will only make you bankrupt. In some extreme cases such as when JCI was shattered at the end of 2008, a brokerage guy who trying to invite customers to open a stock trading account will be reviled.

However, the phase of despair is the lowest point of the bear market, and based on history and law if the market cycle, after that the JCI will rise back to at least above its average (mean). In the chart above, I use the simple moving average of 600 (3 years) as the mean, which if based on the mean lines, these days are the perfect time to invest in stock for the long term, of course with a condition that you can ‘hold your breath’ for at least 3 years.

Only the question, are we arrived at the phase of despair yet, or only at the phase of capitulation? (while the phase of fear, I think we already reached it) Because if we are not desperate yet, that means the JCI could go down further, right? Well, what do you think?

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