I have not been posting lately. Things are just too volatile at this juncture. A number of positions has been hammered. Being a Malaysian, I would also want to wait for GE14  instead of taking any further position. To make matters worse, there are on-going tensions in the Middle East region.

In this posting, I am trying to put a perspective on the continued divergence between FBMKLCI and FBM Small Caps (from 15 May 2017 till 13 April 2018), as shown below:

FBMSCAP vs FBMKLCI

Assuming FBMKLCI is not overbought:

A simple regression analysis is done to understand the relationship between FBMSCAPS and FBMKLCI. Key points are summarised as follows:

  • R-squared is relatively low at 26%
  • FBMSCAPS appears oversold (assuming FBMKLCI is not overbought) – further supported by the fact it did go way below the lower bound of 95% confidence interval. If mean reversion holds, there could be some potential of FBMSCAPS to revert back to its forecasted value of 16,205 pts.

SmallCap-dep.png

Assuming FBMKLCI is overbought:

On another note – what if FBMKLCI is in an overbought position (could be possibly due to the fact that the institutional funds are providing support to the local equity markets?). In this case, assuming FBMSCAPS is fairly valued, what should the FBMKLCI be trading at? Based on an updated regression analysis (i.e FBMKLCI = dependent variable, FBMSCAPS = independent variable), FBMKLCI’s current level of 1,868 is relatively higher than the forecasted value of 1,838 pts but nevertheless, it is within the 95%-confidence interval range of between 1,762 and 1,914 pts.

FBMKLCI-Dep.png

 

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