Potential for market rebound

September 28, 2014

THE local stock market corrected a third straight week on regional weakness after the global central bankers cautioned that the eurozone’s extended slowdown could stall global economic recovery.

Weaker-than-expected United States existing home sales, US strikes in Syria and worries that Russia would nationalise foreign assets to counter Western sanctions were added sentiment dampeners. On a brighter note, small cap and penny stocks saw resurgent speculative rotational buying interest as retail participation made a strong comeback after the school holidays.

Week-on-week, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) lost another nine points, or 0.5 per cent, to 1,840.5, with Maybank (-19 sen), Public Bank (-14 sen), SapuraKencana Petroleum (-11 sen) and Genting Bhd (-17 sen) accounting for most of the losses. Average daily traded volume and value last week improved marginally to 2.5 billion shares and RM2.02 billion, compared with the 2.21 billion shares and RM2.04 billion, respectively, the previous week.

News that Russia could pass a foreign asset seizure bill as a tit-for-tat action against new sanctions imposed by the US and Europe really spooked foreign markets last Thursday. The mirror effect was pronounced on our local market the following day when FBM KLCI shed 14 points to hit a six-month low of 1,829. However, the fact that it recovered 12 points on the same day provides a glimpse of hope that follow-through buying momentum from local funds could continue for the third quarter window dressing.

So, undervalued blue chips like Maybank, SapuraKencana, Tenaga Nasional Bhd, Genting Bhd, etc, could see some buying interest this week. And the positive vibes are likely to spill over into the following week ahead of the 2015 Budget. The small- and mid-cap plays are expected to ride along with the waves before a post-budget profit-taking, in-line with historical trends.

Geopolitical tensions could grease further any potential correction post-budget with issues surrounding Ukraine and Islamic State in Iraq and Syria remaining real threats to global peace and economic growth. With winter approaching, Europe’s high dependence on Russia’s natural gas will tilt the scale in favour of the latter soon.

As the Russian state energy companies turn to China to reduce their reliance on Western demand and Russia retaliating on every Western move to undermine its resurgence of nationalism, the outlook for European economy is turning more and more unfavourable.

The slowing economic wheel will have negative implications on rest of the world given that the European Union (EU) is China’s biggest trading partner and the US is the EU’s largest trading partner. As all trading nations’ prosperities are inextricably intertwined, what transpires externally will have direct impact on our exports growth, which is already showing signs of lethargy in recent months.

That aside, the weaknesses seen in crude oil prices should never be a reason to shun oil and gas-related stocks, as the correction in black gold could be temporary. Prices could rebound as we approach year-end with current geopolitical tensions showing no signs of easing, approaching winter and potential production cuts from the Organisation of Petroleum Exporting Countries to keep prices closer to US$100 (RM32.6) a barrel.

Undervalued O&G stocks like SapuraKencana, UMW Oil & Gas, Pantech and Perisai Petroleum are worthy of investment consideration given their expertise, earnings growth potential and readiness to seize opportunities locally and abroad.

Technical Outlook

Bursa Malaysia shares dipped on Monday. The FBM KLCI slid 3.44 points to close at 1,846.05, off an opening high of 1,851.91 and low of 1,843.85, as losers beat gainers 444 to 384 on cautious trade totalling 2.59 billion shares worth RM1.85 billion.

Blue chips fell the next day, matching regional weakness, following weaker-than-expected US existing home sales and after China’s finance minister indicated the country would not increase stimulus measures based on weak economic data. The FBM KLCI shed another 5.86 points to settle at 1,840.19, off an early high of 1,842.15 and low of 1,832.54, as losers swarmed gainers 527 to 284 on slower trade totalling 2.35 billion shares worth RM2.23 billion.

While blue chips stayed range bound on Wednesday, dampened by global growth concerns and US strikes in Syria, small-cap penny stocks staged comeback on renewed speculative rotational interest. The FBM KLCI ended flat at 1,840.08 (-0.11) after oscillating between early low of 1,838.67 and high of 1,844.77, as gainers led losers 427 to 371 on improved total turnover of 2.69 billion shares worth RM2.2 billion.

Blue chips rebounded the subsequent day due to external strength as US new home sales rose to a six-year high, but profit-taking and weak follow-through buying capped gains. The FBM KLCI rose 3.03 points to close at the day’s high of 1,843.11, off an opening low of 1,835.64, as losers edged gainers 437 to 419 on cautious trade totalling 2.4 billion shares worth RM1.85 billion.

The overnight slump on US stocks, triggered by worries Russia would let its courts seize foreign assets to counter Western sanctions, spilled over to dampen sentiment in the region and locally.

On Friday, the index closed 2.61 points down at the day’s high of 1,840.5, after recovering from an early sell-off to a fresh six-month low of 1,829.24, as losers beat gainers 475 to 322 on moderate total turnover of 2.49 billion shares worth RM1.98 billion.

Trading range for the local blue-chip benchmark index was 22.67 points last week, compared with the 19.66 points range the previous week. The FBM Emas Index shed 46.81 points, or 0.36 per cent, last week to 12,897.5, while the FBM Small Cap Index dipped 74 points, or 0.4 per cent, to 18,642.49, as small cap and penny stocks eased further on mild profit-taking interest.

The daily slow stochastic momentum indicator for the FBM KLCI is hooking up from the borderline oversold area after the rebound from a six-month low last Friday, but the weekly indicator’s trigger line continued to deteriorate closer to the oversold region. The 14-day Relative Strength Index (RSI) indicator eased to a weaker reading at 35.77, while the 14-week RSI slipped to a lower reading at 43.83.

As for trend indicators, the daily Moving Average Convergence Divergence (MACD) trend indicator continued expanding bearishly, reinforcing the bearish expansion seen on the weekly MACD indicator, suggesting further weakness ahead. The -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator also continued to expand bearishly on a rising ADX line, signalling strengthening down-trend momentum.


Except for the daily slow stochastic indicator, which is suggesting rebound potential this week, all other technical indicators that are being tracked imply downtrend going forward.

Nonetheless, near the end of third-quarter, window dressing is expected to shore up blue chips and hence the FBM KLCI. Moreover, the strong rebound on Wall Street last Friday on better-than-expected economic data augurs well for trading sentiment this week.

Immediate resistances for the index are from the present 200, 50 and 100-day moving averages at 1,852, 1,864 and 1,870, respectively, followed by the upper Bollinger band at 1,883, and subsequently the 1,900 psychological resistance.

Crucial support stays at 1,840, the 23.6 per cent Fibonacci Retracement (FR) of the rise from 1,660 low of August 28 last year to the current record high of 1,896 (July 8), and the August 8 pivot low of 1,837, while a breakdown would target next significant retracement support at 1,806, the 38.2 per cent FR.

On stock picks, chart-wise, investors should accumulate on weakness during market corrections blue chips such as Gamuda, Genting Malaysia, IOI Corp and Maybank for long-term upside potential.

Meanwhile, second liner O&G stocks like Alam Maritim and
Wah Seong Corp, conglomerate DRB-HICOM and water-pipe maker Hiap Teck are poised to recover, given the increased buying interest on them.

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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