Follow the money

Malaysian investors in the KLSE have been invariably indoctrinated by the national dailies (read shares analysts) over the past decade or more to watch shares trading volumes to predict the performance of the overall market. Watching overall trade volumes works to a certain extent where underlying shares are cheap but this well worn system would not work if prices rise and shares become more expensive in the midst of a bull run.

In a rising market, it is a ‘no-brainer’ that if trade values remain stagnant, trade volume will fall. Therefore if investors in the KLSE wants to know where the overall stock market is heading, it is better to follow the money. (For individual stocks, investors still have to watch their trade volumes.)

The increase in share prices and the KLCI this year was caused by money inflows to the stock market. Average daily trade values had more than doubled, at times tripled compared to that of 2006. However the current daily trade values of 2 to 3 billion ringgit cannot sustain the KLSE going forward as shares prices rise in this Bull Run. More liquidity is required.

If investors think that the current daily trade values is substantial, look at those of our neighbors. If you compare the daily trade values in the Bull Run of 1993 to those of our neighbors and now, you will find that the KLSE has fallen way behind.

The values traded in the KLSE used to be ten times more than those of the New Zealand stock market, a few times more than the Thailand Stock Exchange, and larger than that of the Singaporean market.

Used to be no longer count, since the daily trade values in the NZ, Thai and Singaporean markets have been raised substantially by foreign money inflows. The average current daily trade values of these three markets are RM 540 million, RM 4 billion plus, and RM 6 billion respectively. To put Malaysian readers into proper perspective, the daily trade values in the Hong Kong Stock Exchange average RM 45 billion.

It is not that I am smarter than the average share trader, but if we really think about it, the share market is all about money. Something one had learned from reading the Far Eastern Economic Review and the depicted Morgan Stanley weekly charts (showing trade values) on Asian stock markets in the 1990s. With more money chasing shares, commodities, real property, these investments will naturally rise. Inversely when money dwindles, the prices of investments fall. (Think Changes and the current US property market)

Such is the case of the KLSE. On Monday July 16, the day’s trade value fell below the previous week’s daily average of RM 2 billion plus. The following Tuesday and Wednesday trade values were higher but still below their respective T+3 values. The stock market fell those three days. The KLSE only rebounded on Thursday and Friday when their trade values reached RM 2.5 billion or more. The trade value hit RM 2.67 billion last Monday and on Tuesday it hit RM 3.25 billion sending the KLCI to its highest ever close of 1,392.18. Is this not a good enough reason to follow the money?

The Shanghai Composite has since stormed back to 4,323 points from its recent lows of 3,500+, while I give up trying to predict when the KLCI will hit 1,400. However the Yi chart still shows a good KLSE.

For individual stocks check their trade volumes, but for the overall stock market remember to follow the money.

Good Luck!