The dysfunctional global financial system is a riches-to-rags tale, where even billionaires around the world have suffered billion-dollar losses while market participants are salvaging whatever is left of their investments.

With the dip in global markets and the gains from the commodity bull run fast being erased, should market players wait on the sidelines or should they look at their game plan again?

Traders feel there are trading opportunities but they are generally bearish on the market. The buy for long term strategy will not work in the current market, they opine.

Futures trader Brent Penfold says the “buy- and-hold” strategy adopted by most investors is archaic. “Investors with this strategy will look to exit investments only if they could sell at a profit. With markets heading lower, investors are stuck as their only option to exit is closed due to weaker stock prices,” he says.

He adds that investors governed by the buy-and-hold game plan believed in the notion that markets will always recover. “One needs to hang in there and eventually do well… but that is not the case when the Nikkei index is still 80% down from its 1989 peak,” says Penfold.

“There is nothing strange in the market’s current movements. Certainly, the volatility has been extreme. However, the bear market movement in prices is not a surprise. While the swings have been large, the markets are just doing what they have always done — moving from periods of high valuation to periods of low valuation,” he says.

If investors develop a better understanding of business cycles, they would be able to understand markets better. “This underpins my approach to investing. I prefer to time my share investments rather than the buy-and-hold method for the long term. To invest in the Malaysian share market, I’d look at the sentiment indicator on the Kuala Lumpur Composite Index,” says Penfold.

Sentiment indicators are used in technical analysis to quantify the level of optimism or pessimism that is present in the various markets.

Investors should only look to invest when the KLCI is above the sentiment plot and take profit to remain in cash position when the index falls below the indicator, says Penfold.

The KLCI was trading at 869.24 points last Thursday while, according to Penfold, the sentiment index was at 1,072 points. A prominent chartist, Daryl Guppy, who runs Guppytraders.com, reckons that there is a strong possibility that the KLCI will retest lows and support near the 800-point level.

“A fall below this has very strong support, near 600. I am looking at rally trading opportunities in a trading band, with the potential to test downside support near 600. However, I am looking for a fast rebound from the lower support area and this will provide an excellent recovery rally opportunity,” says Guppy.

Over the past few weeks, global and regional stocks have reached new lows. For instance, the S&P 500, which tracks the broader market on Wall Street, closed below the 700-point level last week, for the first time since October 1996. However, does this indicate a recovery is in sight and that markets have bottomed out?

“That is a million-dollar question right now. To a certain degree, it is irrelevant as the market will do what it will do rather than we would like it to do,” says Dale Gilham, chief analyst at Melbourne-based private investment firm Wealth Within. “It does not matter how much I think the market has bottomed out as all that matters is that one day it will bottom out. In saying that, I do believe most markets hit the bottom around November 2008, but this is still to be confirmed.”

“As a trader, the only two things I can control is getting in and out of the market. It is not my job to pick the bottom of a market or a share but rather trade with the trend. Therefore, I sit back and wait for the opportunities as they arise,” he adds.

While few would argue that China is a key driver of global economic growth, the Chinese economy suffered last year, along with the other emerging markets, dragged down by a slowdown in the global economy. Nevertheless, some observers believe that the fiscal stimulus programme announced by the Chinese government will be sufficient to boost the economy.

However, Penfold argues that there is still much negativity in the market. “Any negativity for me means being patient in investing. There is no need to rush to invest in any shares at the moment. Prices will recover and good times will present themselves again. But at the moment, it’s best to continue to be patient, remain in cash and preserve your capital,” he says.

While the greatest gains could be made in emerging markets, there is always the fear that the biggest losses could also come from these markets, says Gilham.

“China has fallen over 64% from its highs in October 2007, with no sign that the fall is over. If you factor in the currency risk of these economies, the picture becomes less attractive to all but the very experienced traders who can manage the multiple risks that are inherent in investing in these markets. History has shown that those who take a conservative view and only invest in proven solid markets on the whole do much better than those who speculate on the next big opportunity,” says Gilham.

Guppy, however, is bullish on China. He describes China as not only an emerging economy but also an emerged economy that is on track to becoming one of the top three economies in the world within the next few years.

“To talk of China as an emerging economy is to underestimate Chinese development, and this incorrect thinking means you miss opportunities,” he says.

As for emerging markets such as Vietnam, Guppy says there are opportunities for those who want to physically invest in business and infrastructure. However, they provide fewer opportunities for people who wish to trade in the market. He adds that small economies show greater volatility because they are more at the mercy of fund flows. “They are traded as a speculative rather than an investment market. This is not bad because it adds liquidity to the market,” he says.

Both crude palm oil (CPO) and crude oil traded at historic highs last year. However, since the global financial crisis led to demand erosion for both commodities, prices have come down by more than 50% for CPO and more than 74% for crude oil, which had risen to US$147 a barrel in July last year.

In 2009, market pundits predict, there will a slight recovery in the prices of both commodities when demand returns, albeit gradually.

“For soft commodities, seasonal variations will still prevail, but the exceptional volatility of 2008 is less likely to develop,” says Guppy, adding that CPO could see upside resistance at RM2,300 a tonne and then again near RM2,600 a tonne.

While there is potential for a new rally, there could be an extended consolidation between RM2,300 and RM2,600 a tonne, Guppy adds.

Penfold, who turned bearish on CPO in September last year, advises traders to be cautious about their trading positions in the commodity. “With prices below RM2,054 a tonne, I would not advise traders to build a long position on the commodity. No doubt, there will be a bottom somewhere but I prefer to be investing in strength and that will not occur until prices can climb back above RM2,054 a tonne,” he says.

A recovery in crude oil  prices should happen towards 2H2009, says Gilham, with crude oil trading at around US$70 to US$75 a barrel by September or October 2009. However, he cautions that trading will be “quite volatile and crude might even fall slightly in the short term”.

Guppy, however, thinks crude oil could fall further. He says there is a high probability that crude oil will spend most of the time in a broad trading consolidation band of between US$32 and US$58 a barrel.

“Crude oil price movements above US$58 would be capped by resistance near US$70. While the global economic slowdown continues to exert downward pressure on prices, traders continue to have opportunities to trade good rallies within this trading band,” says Guppy.

These three traders will be presenting key papers at the Asia Trader & Investor Convention on March 14 and 15, 2009, at the Kuala Lumpur Convention Centre.

This article appeared in the Corporate page, The Edge Malaysia, Issue 745, March 9-15, 2009