Stock index due for correction this week

Reni A. Witular, The Jakarta Post, Jakarta

After rallying to another historic high late last week, the Jakarta Composite Index is ripe for a correction this week on expectations of hefty profit-taking in regional stock markets ahead of the lunar new year holiday.

The Index jumped by 2.21 percent, or 39.52 points, to 770.33 last week, up from 730.81 the previous week.

However, average daily volume declined to 2.114 billion shares worth Rp 1.06 trillion (US$127 million) from 3.968 billion shares worth Rp 1.52 trillion the previous week.

A stock analyst with a state-owned brokerage house said that regional sentiment would drag the index lower this week as investors would book quick and high returns, taking an advantage of shorter trading days.

He explained that the shorter trading days would leave investors generally reluctant to build up fresh positions.

Lunar new year falls on Jan. 22.

"The (Jakarta) index will tail the negative movement in the regional markets. But still, the overall underlying sentiment remains strong and the index is unlikely to go below 750," he said.

Besides tailing regional sentiment, the index was also prone to correction as it had risen too fast, making it vulnerable to speculators seeking quick profits, he said.

The index has moved full-throttle ahead since the start of trading this year on the back of investor euphoria over the country's improved macroeconomic conditions and the optimism pervading stock markets worldwide.

Since Jan. 2, the index has surged ahead by 65.84 points.

The low equity valuation of the index had also encouraged foreign investors to put their money into the local bourse as they believed many bargains were to be found.

Growing market capitalization has also attracted many new investors from the United States and Europe to seek gains in the local bourse. Large market capitalization enables them to rake in bigger profits.

It is estimated that 80 percent of the money that has recently entered the Jakarta stock market is from foreign investors, making the bourse overly sensitive to negative news, whether local or international.

Analysts have also said that the recent sharp decline in the central bank's benchmark interest rate, which hit an all-time low of 8.06 percent, was another factor driving the index higher.

However, some analysts, such as Faisal Basri, believe that the recent surge in the index is driven mainly by money laundering by corruptors and those engaged in illicit businesses.