Market Topping

As KLCI is highly correlated with portfolio investment - foreign fund. it is beneficial to do so as emerging market is providing higher growth and US is flashed with cheap funds. Typically, the foreign funds will chase KLCI higher as more and more funds is poured into KLCI.

Observation:
1. Change of foreign fund direction is determined by the fundamental parameters - GDP growth, interest rate, unemployment rate, G policy, G infrastructure spending, consumer spending, consumer sentiment. Generally, these parameters do not change speedily. A target of KLCI will be determined based on the prevailing macro parameters.
2. Once the foreign funds decided to come-in, it will remain on-shore until the fundamental parameters deteriorate or rather KLCI target is achieved.
3. As the foreign funds coming/existing gradually, their activities are recorded in portfolio investment funds movement.
4. Any spike in net portfolio movement indicate market top or market bottom.

It will be interesting if the chart above overlay with USD/MYR.

Observation:
1. Highest net out flow (longest bar below zero) indicate peak of USD strengthening - occurred in Q32008
2. Highest net in flow (longest bar above zero) indicate bottom of USD weakening. - occurred in Q22011.
3. coincidental, highest net inflow has pushed KLCI to the peak and USD is the weakest in Q22011.

Weakeness:
1. portfolio investment funds flow from BNM is lagging indicator - ie available on quarterly basis. - can only be used to verify past action

Usefullness:
1. USD/MYR will provide an almost immediate tracking of the foreign funds movement.
2. Any spike of USD/MYR always give an indication of change of funds direction.