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Jakarta Post

Beware of seasonal correction in stock market

  • Adam Rizky Nugroho

    Bareksa.com

Jakarta   /   Tue, September 6, 2016   /  09:53 am
Beware of seasonal correction in stock market A panel at the floor trading of Indonesia Stock Exchange building in Jakarta, on Oct. 19, 2015 shows the trading data of stocks and Jakarta Composite Index (JCI) . (the jakarta post/Wienda Parwitasari)

The stock market has seen a bullish trend, giving a 17.27 percent return since early this year. However, analysts have warned that a correction may come shortly due to several factors.

The Jakarta Composite Index (JCI) closed at 5,386 at the end of August, 3.2 percent higher than the closing level in July. Entering September, the index will likely enter a consolidation period.

"I can only wait and see. Still waiting to find the bottom of the JCI's downward trend," Satrio Utomo, head of research at Universal Broker Indonesia, said in Jakarta recently.

On the first day of September, the JCI closed at 5,334.54, which was 0.96 percent lower than the previous trading day. This indicates that investors are cautious over the valuation, which shows the bourse index is getting more expensive, both technically and fundamentally.

Such a correction was predicted by Ellen May, a practitioner who has more than 10 years of experience in the market. Based on her technical analysis, she warned that the index showed negative signals.

"JCI forms a bearish candle pattern for the short-term, which shows the alert signals. JCI is likely to retest its support at 5,300 in the next few days," May stated in her morning note, published on Aug. 22.

Source: Bareksa(Bareksa.com/Bareksa)

Fundamentally, the JCI also looked quite high based on its price-to-earnings ratio (PER). Excluding HM Sampoerna’s stocks that weighted the index, the JCI traded above its six-year historical mean at 16.1 times one-year forward PER, according to Citi Research in a report published on Aug. 22.

Citi also stated that the market would need more catalysts for a further rally, although inflows to the market — mostly from the US and European countries — continue, especially post-Brexit and Sri Mulyani Indrawati’s comeback as finance minister.

Seasonal correction

According to historical data, the JCI usually moves sideways during August to September as seen in the last five years. In August to September 2011, the stock index fell more than 15 percent, while in the same period of 2012 the JCI moved sideways in the range of 4,100-4,200.

In Aug. 2013, the stock benchmark dropped to 4,000, erasing gains scored a year before. The same pattern of movement could be seen in September 2014 and September 2015.  The simple explanation for such corrections is that investors were taking profit.

However, after the seasonal correction, reversals almost always occur in October.

October is usually the starting point for the index to strengthen until scoring new record highs next year. From 5,100 in early October 2014, the JCI reached a new high of 5,500 in April 2015. Last year, the JCI started rising from 4,200 in October 2015 and reached 5,300 at the end of August 2016. (ags)

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