Downward drift likely to continue

September 14, 2014

THE local stock market was stuck in directionless trade in the early part of last week on lack of leads and quiet regional trade, with most major north Asian markets closed for the mid-autumn festival.

Concerns that the United States Federal Reserve (Fed) may increase interest rates sooner and intensified geopolitical risks after the US joined the European Union (EU) in contemplating new sanctions against Russia, and its campaign to counter Islamic State extremists in Iraq and Syria, sparked a late sell-off ahead of the weekend.

For the week, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) shed 12.82 points, or 0.69 per cent, to 1,855.64, with Sime Darby (-46 sen), Public Bank
(-30 sen), Maybank (-14 sen) and CIMB (-10 sen) contributing to most of the losses.

Average daily traded volume and value last week dwindled to 2.37 billion shares and RM2.02 billion, compared with the 2.75 billion shares and RM2.15 billion, respectively, the previous week.

Trading momentum deteriorated further due to extended profit-taking on both blue chips and small cap penny stocks on the broader market.

The downward drift in FBM KLCI looks set to continue, given no signs of fizzling in external issues.

Apart from the ongoing conflicts, the impending referendum on the independence of Scotland from the United Kingdom (UK) on Thursday may keep investors on the sidelines this week.

Although the latest opinion poll showed that dissenters outweighed proponents at 53 per cent to 47 per cent, any unexpected turn of events leading to a separation can have devastating impact on the financial markets, especially in Europe.

A separation can prolong market uncertainty and appetite for investments in the UK.

The apparent concerns will be the impact on the British pound, economic growth and the seen and unseen costs of integration on future policies.

As far as Malaysian-listed companies are concerned, the volatility in pound could affect them adversely or positively, depending on their net trading position.

Net exporters trading on pound-basis will feel the crunch when converting the earnings into ringgit but net importers will benefit.

Stocks like Sime Darby, SP Setia, YTL Power and Pantech with operations in the United Kingdom could face some selling pressure this week, due to the uncertainty.

Sime Darby and SP Setia are likely to recognise profits from their respective 40 per cent-owned Battersea project by mid-2016.

The impact from every five per cent change in pound/ringgit is expected to be less than one per cent on earnings but the weaker pound should work in their favour when it comes to sales as foreign buyers topped the list of buyers for the Phase 1 and 2 that have been launched to-date.

YTL Power’s exposure to the pound is via Wessex Water and could lead to about three per cent erosion in earnings for every five per cent change in the pound/ringgit rate, the impact can be neutralised by potential forex gain on borrowings as total debts amounted to £1.9 billion (RM9.75 billion) of the group’s total debts.

Pantech derives four per cent and one per cent of its revenue and operating profit from UK, respectively. For every five per cent weakening in the pound, its earnings will be impacted by 0.4 per cent.

As it is, as YTL Power and Pantech are considered undervalued and the impact from movement in the pound is expected to be minimal, any knee-jerk correction in share prices should be a good opportunity to buy on weakness.

Technical outlook

Bursa Malaysia shares extended range bound trade last Monday, with most investors sidelined amid lack of positive domestic catalysts to lift the market.

The FBM KLCI rose 2.63 points to settle at the day’s high of 1,871.09, off an early low of 1,865.53, as gainers led losers 474 to 353 on a moderate turnover of 2.68 billion shares worth RM1.93 billion.

The local stock market was stuck in directionless trade the following day due to lack of leads and quiet regional trade, with major north Asian markets closed for the mid-autumn festival.

Nonetheless, the KLCI added 3.03 points to end at 1,874.12, off an early low of 1,867.98 and high of 1,876.21, as losers edged gainers 420 to 399 on modest trade of 2.45 billion shares worth RM2.01 billion.

Blue chips eased back into profit-taking correction mode on Wednesday, mirroring regional weakness amid concerns the Fed may increase interest rates sooner than expected.

The KLCI slid 3.27 points to close at 1,870.85, off an early low of 1,868.36 and high of 1,873.79, as losers edged gainers 424 to 399 on a slower turnover of 2.18 billion shares worth RM2.01 billion.

The local market extended sideways trade the subsequent day, as blue-chips eased further on sustained profit-taking interest while small cap and penny stocks slid lower amid easing trading momentum. The KLCI shed another 4.74 points to end at the day’s low of 1,866.11, off an opening high of 1,874.67, as losers edged gainers 430 to 412 on cautious trade totalling 2.04 billion shares worth RM1.91 billion.

Key blue chips suffered a late sell-off ahead of the weekend, depressed by increased geopolitical concerns on news the US will join the EU on more sanctions against Russia because of the country’s continued support of separatists in Ukraine, and its campaign to counter Islamic State extremists in Iraq and Syria.

The index slumped 10.47 points to close at the day’s low of 1,855.64, off an early high of 1,868.05, as losers beat gainers 435 to 389 on a higher total turnover of 2.49 billion shares worth RM2.23 billion.

The trading range for the local blue-chip benchmark index stabilised at 20.57 points last week, compared with the 18.97 points the previous week.

The FBM-EMAS Index slipped 64.09 points, or 0.49 per cent, last week to 12,991.51, but the FBM-Small Cap Index edged 30.70 points, or 0.16 per cent higher to 18,823.77, as small cap and penny stocks stayed resilient amid mild rotational buying interest.

The daily slow stochastic momentum indicator for the FBM
KLCI turned bearish following last week’s late selloff, which dragged down the weekly indicator’s trigger line to flash a weak sell signal.

The 14-day Relative Strength Index (RSI) indicator turned south for a bearish reading at 40.38, while the 14-week RSI declined for a weaker reading at 49.02.

Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator’s trigger line hooked down to flash a fresh sell signal, while the weekly MACD expanded lower to indicate further correction potential.

The -DI crossed above the +DI line to also trigger a sell signal on the 14-day Directional Movement Index (DMI) trend indicator, another negative indication of further downside bias.


Fresh sell signals on the daily MACD and DMI indicators and weekly stochastics triggered by the late selloff on the FBM KLCI last week implied further correction potential this week.

Market sentiment weakened given the slower trading momentum and the absence of positive local leads. It is further dampened by the bearish external tone amid rising geopolitical risks in the Middle East and higher probability for a sooner-than-expected hike in US interest rates, prompted by stronger-than-expected economic data and uncertainty over Scotland’s referendum to breakaway from the UK.

On the index, a breakdown below the crucial 200-day moving average support level, currently at 1,850, will open up downside possibilities to 1,840, 23.6 per cent Fibonacci Retracement of the rise from 1,660 low on August 28 2013 to the current record high of 1,896 on July 8 this year, which was cushioned by the August 8 pivot low of 1,837.

On the upside, expect initial resistance from the overhead 50 and 100-day moving average levels at 1,872, followed by the upper Bollinger band at 1,879 and the 1,900 psychological resistance.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.

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