Stock index due for correction this week

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.