You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

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Invisible Correction of the Stock Market

Until Tuesday, 12 September 2017, foreign or international investors kept selling their stocks in Indonesia stock market so much, that their net buys position from the beginning of the year, which almost reached Rp20 trillion in the last April, today it has been minus aka turned net sells, precisely at minus Rp7 trillion. I also received many questions, why foreign investors keep selling? However, the most important thing here is not the reason why they’re getting out, but what are the effects of these conditions to the market. And what is the best investment strategy to counter these issues?

The comparation of domestic and foreign until 12 September 2017, please note that domestic investors are now dominating the trading value by 64% (usually only 50 - 55%).

Based on my experiences, when foreign investors buy or sell stocks, it will affecting the movement of Jakarta Composite Index (JCI) in short term – in this case about a few weeks or months. So if they buy a lot, JCI will go up, otherwise if they sell, JCI will go down. Actually in the long-term or years, compared to buy or sell positions by international fund managers, there are many factors which have more effect to the movement of JCI. But in shorter terms, let say in October 2011 and May 2012, JCI had dropped about 15 – 20% from its highest position, and one of the triggers was the massive net selling of foreign investors in those months.

Nevertheless, since 2016, here’s what happening: When foreigners buying, JCI would go up, meanwhile when they were selling, JCI did not go down – but went sideways. If you noticed, since the market hit by panic selling in August – September 2015, JCI has never gone down by 10 – 20% from its highest position, and this is unusual. If we look at JCI movements before 2015, the index usually will experience corrections in certain months, either in May, August, or even January. Including in 2010, that although JCI was up 46% in the year, in May 2010 JCI had once dropped more than 20%, from 2,971 to 2,501.

At a glance, it is good that we are in a market condition where the JCI was stable and without corrections, so nobody seems to lose money. However, this condition caused at least two problems.

First, although JCI corrections seem bad, but it is necessary so that some stocks that gained so much until their price become overvalued, they could go back to their buying level (ie fair or undervalued price). That is why the decline of stock index often called market corrections, because it actually brings back the stock prices to their own normal/low level. Based on the history, if the stock prices continuously go up without any healthy corrections, it could lead to stock market crash. For example, in 2003, 2004, 2005, 2006, and 2007, the JCI kept going up from 700 to as high as 2,700, or up more than 3 times in no more than 5 years, and almost without any significant corrections. And thus, we have already known what happened later in 2008.

Luckily, although JCI has not been in correction since September 2015, but the increase in JCI in the last two years were moderate at about 40% in total. In other words, the increase was not as fast as in 2003 – 2007. What we have to remember is, the macroeconomic conditions nowadays are relatively better than in 2015, so the increase of JCI is reasonable, and I don’t think that the market crash in 2008 would happen again. But my point is, when JCI keeps going up without ‘break’, that is not as good as it seems, and it actually makes our job harder in finding a stock that is worth investing.

The Market is Currently in Correction

Secondly, based on JCI movement, we can say that Indonesian stock market has not yet in bear period since August – September 2015. Still, when foreign investors are selling their positions, some stocks start to decline significantly, and keep declining. In August 2016, when the euphoria of tax amnesty sentiment started evading, foreign investors that bought massively began to get out from market, and at that time the JCI was stable at 5,400 levels (once dropped to 5,100s in September, but quickly rebounded). Nevertheless, there were many stocks, which surged up in June – July 2016, slowly but sure going back down. I remember when Gajah Tunggal (GJTL) jumped from 700s to 1,700s in May – August 2016. However, in September, it was turned down to 1,000s, and never rise again until today.

But GJTL was not alone, because there were many other stocks including big caps (BBRI et al) that tend to move down in September to the end of the year. But somehow, the JCI only downed a little and finally closed at 5,297 on 30 December 2016 (compared to the highest level in October at 5,470 point).

And in the second semester of 2017, it is clear that the same condition is happening once again: The JCI looks stable, but since May 2017, foreign investors kept selling. As the results, many stocks were down, and some of them even dropped to their lowest positions in the last five years. The most visible decline was construction, but the sector stocks also got hit, no matter they had good or bad fundamentals, and no matter they had low or high valuations.

So if you said that market has not been in correction since 2015, then it is not entirely right. If we look at the movement of stocks, and not only the movement of JCI, here’s the fact: In September – December 2016, the market were in correction, and recently the market were in correction once again. Because on the other hand, the JCI seems to be stable, I could say thay these are invisible corrections of the market.

And frankly, I prefer a normal market correction where the JCI is actually falling down. I mean, if we assume that the JCI is going down, the strategy will be very simple: Immediately sell our holdings, in order to collect cash for later shopping. That was what we do before the panic selling in 2015. But what if the situations are like today? Where most of the stocks are falling, but the JCI as the benchmark just kept rising??

The First Strategy: Wait and See from Outside

Anyway, I spent a lot of time to rearrange the investment strategy to counter these uncommon market situations. Here are some options that you can do.

First, we can apply the normal strategy when the market is in bearish: You can sell some of your stocks, hold the cash, and wait until the beginning of 2018. Why should we wait until the beginning of year? Well, reflecting to the market situation in second semester of 2016, even the big caps that almost unshakable were finally dropped at the end of the year (December) and JCI itself was down but not significantly. The cause of declining stocks at that time is also similar to current situation: Foreign investors keep selling. The important thing is, we would never know when these international fund managers will get back to market. Until today, clearly there is no certain positive sentiment that could trigger foreign inflows to the market. Just like the domestic investors, foreign investors usually only buying at the beginning of the year.

The weakness of this strategy is that you will miss the opportunity at certain stocks that keep moving up. Because when JCI dropped, most stocks would also drop. But when the JCI is stable like today, then some stocks are keep going up (albeit most stocks are still going down, because of ‘invisible market correction’ that we mentioned above). Just like in 2016, when coal stocks started rallying in September – October.

But only with this strategy, you will not bear any risk that your stocks going down (because you are holding cash) and most importantly: If you have some particular stocks as buying target, you will only have to wait for a few months, and later you will earn much profit in 2018. For example: In 2016, stock of Bank BNI (BBNI) was only moving sideways in range 5,000 – 5,500, even dropped to 4,000 in May. However, entering the 2017, BBNI finally rallied and now is at the level of 7,000s, making profit more than 40% just in few months (or even 70% if you bought at 4000s).

Not only BBNI, there were many other stocks that went nowhere in 2016, and only rose again in 2017. What I mean is, although you will be late in ‘catching the train’ with this strategy, but you do not have to worry because there will be more other trains waiting for you at the beginning of 2018. In 2016, banking stocks almost made no profits at all and it seemed bad, because the JCI gained 15.3% in 2016. But in 2017, as you can see, BBRI et al gained the most (compared to other big cap stocks).

However, applying this strategy really needs an extra patience and I know exactly that some of you are not patient enough to wait even for one day. Therefore, the following is the second strategy.

The Second Strategy: Selective Buying

Secondly, you can still buying/holding certain stocks, but this time you have to be more selective. In the past few months, I have observed the stocks that are moving up, and there are two common similarities: 1. They are quite popular stocks/companies, not only in the eyes of investors but also common people, 2. Technically, they are in uptrend since the beginning. The question is, how do those two similarities happen?

And here are the possible reasons. Some time ago, the Indonesian Central Securities Depository (Kustodian Sentra Efek Indonesia, or KSEI), claimed that the number of retail investors in the market reached 1 million accounts, tripled from 2013 that only had 350,000 accounts. Thanks to the campaign of ‘Yuk Nabung Saham!’ (let’s invest in stocks!) and other promotions by the IDX et al. Even though these new investors did not directly deposit a huge amount of money to their securities accounts (because nowadays you can open a stock trading account by only depositing Rp100,000 or about US$ 10, compared to minimum deposit of US$ 500 in 2019). Thus, it is clear that the stock market nowadays are dominated by domestic investors (not dominated by foreigners as before), which some of them are new faces that are unexperienced, and still needed time to learn how to analyze stocks, etc.

And if you are a newbie in stok market, then what shares you would buy for the first time? Exactly! The shares of a company that you know well, such as Unilever Indonsia (UNVR), Telkom (TLKM), or Bank BCA (BBCA).

Then secondly, the stocks should be moving up, aka in uptrend. Logically, if some people without enough knowledge (aka newbie) is interested to buy certain stock, but the stock is in downtrend, then automatically he/she will be afraid to buy it because it seems that the stock will go down further. However, if he/she heard that the stock A is going up, then he/she will buy it, hoping that the stock would go up further. This is simple logic if you are buying stocks without analysis (and currently, the market is crowded with this type of investors/traders).

Consequently, if you look carefully in these few months, the stocks that are going up are keep going up, meanwhile the stocks that are going down keep going down. For some moments, it seems like value investing rule is not working. Normally, if there are fundamentally good stocks that dropped, the decline will stop at certain point where investors assuming the valuations are low enough. But what happening today is, if a stock is going down, it could go down to any level, simply because either foreign or domestic investors are not going to buy it.

Thus, for the second strategy, besides determining the criteria that the company have to be fundamentally good and in low valuation, you also have to add at least two more criterias, which is 1. The company is popular in name, and 2. The stock price is in uptrend, or at least not in downtrend. The good news, though some stocks that in uptrends, their valuations are not low anymore, but there are some uptrend stocks where the valuation (PER and PBV) are low. Therefore, you still have choices of stocks to buy. (Note: In determining if a stock is in uptrend or downtrend, you have to look at its chart for at least 6 months before, no shorter than that).

However, the second strategy above certainly has risks, where stocks that have gone up high could go down if some people do the profit taking, and it is clearly not in accordance with value investing rule, because we are supposed to buy stocks that nobody else buy it, not join the crowd instead. In this case, you can take the first strategy, which just wait and see outside. Alternatively, you can keep buying stocks, but leave a big amount of cash, like 30 – 50% from your total portfolio. Psychologically, holding cash in big amount will help us to stay calm facing today’s uncommon market situation, including helping us not to feel bad to sell stocks in loss positions, if necessary.

And if you choose to wait and see outside, then remember, today is already September, which mean that next year is only 3 – 4 months to go. Anyway, whichever strategy you chose, you have to realize that if your today’s investment performance is not satisfying, you are not alone as other investors also have the same problems, because the JCI is not as stable as it seems. And also remember that the market will not be forever unfriendly like it is today, but there will be time for Mr. Market to be friendly once again. So, good luck!

Original article was written and published (in Indonesian Language) on September 13, 2017. Any inquiries, contact the author (Teguh Hidayat) by email

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