It's been nearly four and a half months of consolidation on the Karachi Stock Exchange. The move that comes largely as a corrective mechanism points to wait-and-see game adopted by the investors, as they settle in, while trying to gauge what does the future hold. Embryonic beginning of a new cycle has begun.
Anyone whose memory serves him well can recall how the KSE-100 index churned in and about a tight band of 5000~5600 points, with odd upward/downward spike here and there, between April and November 2004. The market then saw a sharp breakout of nearly 4700 points to max out at 10,304 by spring 2005.
Draw an analogy to that today and we find the benchmark index gyrating within a broad band of 1000 points since April last. That's the longest period of range-bound movement since its previous long-term cycle began in second half of 2004 and ended at 4800 points at the start of this year.
Investors are keenly looking for signs of optimism about the economic outlook and the government's policy direction. Hence, waiting for a trigger - any trigger - to which they can react. The current congestion has built a strong base between 6900~7900 points to support a northbound rally. The momentum is gathering heat as well with moving averages gradually turning up - a signal that a bull market lies ahead.
But where would it likely top out, many wonder. The answer to that lies in history. Given the market's strong resistance around 9900~10,100 points - its 400 DMA - the index will likely loose steam around the same point; albeit, with a potential overplay of another 300~400 points on account of those investors who wake up late and get blinded by valuations.
This is also substantiated by economic outlook. The 4700-point rally in 2004-2005 was driven by a strong economic outlook with growth averaging 7.5 percent over the next two years. If we draw parallels to that, and optimistically assume an output growth of an average 3.5 percent, we would likely see the index at 10,100 points by the end of third quarter fiscal year 2010.
That's the short-term. The medium-term outlook, however, is a bit disturbing. Once near its famed March 2005 zenith, 100-index is expected to witness a healthy correction followed by a prolonged period, at least a good 12 to 18 months, of dormancy near 6500~ 8000 points.
While the nature of correction depends much on investors' view of the economy at that particular point in time; current trends show that a gradual retracement in wedge-like fashion - inversely mimicking its hiccup-laden rise between August 2005 and April 2008 - is more than likely. This is, unless of course, expectations of economic fundamentals change over night. Until that happens, be cautioned for the medium term.
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