Uneventful, sideways Bursa trade looms

 

Oil & gas-related stocks should see buyers returning after crude oil prices bounced back, with Dialog, Kencana, SAAG, SapuraCrest and Scomi likely to benefit, says a research head

Share prices on Bursa Malaysia suffered a sell-down last Monday, triggered by sharp corrections in the Chinese and Hong Kong stock markets on concern China will curb bank lending to the property sector in efforts to stamp out speculation. However, stocks rebounded from the sell-down towards the Christmas holiday break but buying momentum deteriorated as market players and investors stayed away for the year-end festive season.

Week-on-week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) declined 3.03 points, or 0.24 per cent, to close at 1,263.94, with losses in IOI Corp
(-13 sen), CIMB (-18 sen), and Tenaga (-8 sen) offsetting gains in Genting Bhd (+8 sen), DiGi.com (+50 sen) and Genting Malaysia (+4 sen). Daily average traded volume and value slowed significantly to 429.4 million shares worth RM678.3 million from 597.1 million shares worth RM863.9 million in the previous week.

Global markets’ reaction to any development in China is understandable given the latter’s growing dominance with the republic set to overtake Japan as the world’s second-largest economy next year. Although the Chinese government has pledged to maintain a moderately loose monetary policy in 2010 to sustain growth, it may have to review its fiscal and monetary policies to prevent overheating in the economy.

With its growing prominence in world trade, expectations are rising for China to adapt a flexible foreign exchange regime which could strengthen further its currency against the US dollar. As the ringgit has tracked the yuan’s movements in the past, further strengthening in the ringgit could be an important catalyst to attract inflow of fresh foreign funds into the local market.

Thus, it is more important to take cognizance of market drivers over the next three to six months than harp on year-end window-dressing, which is expected to be a non-event based on dwindling trading volume and lack of catalysts to drive up the market in the immediate term. There is no change in the target of 1,255 for this year-end. In the absence of positive leads, the local market could drift sideways this week.

Maintain earlier view of a market rally in the first half of 2010 (1H10) underpinned by continuous upward revisions in corporate earnings growth, strong liquidity, ringgit strengthening vis-à-vis the US dollar that will attract foreign capital, robust domestic demand and a recovery in crude palm oil prices in 1Q10.

The “January Effect” could provide a good start to the year as it prevailed in the last 10 years, except for 2008 when the benchmark index corrected from its peak of 1,525. For a simplistic comparison of the “January Effect”, during the previous major downcycle in 1998, the benchmark index corrected by 4.2 per cent month-on-month (MoM) in January 1998 before rebounding 0.9 per cent and 13.5 per cent MoM in 1999 and 2000 respectively. Similarly, it corrected by 3.5 per cent MoM in 2008 before gaining 0.9 per cent MoM in 2009. Whether it will repeat a similar feat of a double-digit expansion in 2010 is anybody’s guess but market dynamics are pointing towards a meaningful start ahead of the Year of the Tiger.

Thus, investors should continue to nibble undervalued high beta plays and defensive stocks that have some growth prospects for a possible rally towards 1,390 in first half next year before turning cautious as we approach the second half of 2010. Market volatility is expected to increase in the second half as central banks around the globe start tightening their monetary policies and governments engineer their exit strategies and scale down spending. Anticipate the market to correct by 10 to 15 per cent from its peak to end 2010 lower at between 1,180 and 1,250.

Technical outlook

Blue chips on the local stock exchange fell in a significant profit-taking correction on Monday, led by banks and plantation stocks due to sharp falls in regional banks and CPO prices. The index closed at the week’s low of 1,255.66, but bounced back for the remainder of last week, helped by a rebound in the region led by Hong Kong after the central bank there indicated banks will report improved profit growth for the year.
The FBM KLCI dipped from early Monday’s high of 1,267.73 to a closing low of 1,255.66 for the day, narrowing to a 12.07-point trading range last week, compared with the 16.52-point range in the previous week.

The daily slow stochastics indicator for the FBM KLCI flashed a buy signal following last week’s rebound from Monday’s sell-off, but the weekly indicator slid from the overbought region for a reading of just below 70. The 14-day Relative Strength Index (RSI) indicator recovered for a reading of 50.73 last Thursday, but the 14-week RSI declined marginally for a reading of 68.81.

Meantime, the daily Moving Average Convergence Divergence (MACD) indicator trigger line continued levelling at the zero mark, indicating lessening bearish momentum, but the weekly MACD deteriorated further. As for the 14-day Directional Movement Index (DMI) trend indicator, the ADX line levelled further for a non-trending reading of 14.93, with the +DI and –DI lines sustaining a bearish sell signal.

Conclusion

While daily technical indicators for the FBM KLCI registered improved readings following last week’s recovery, weekly indicators continued to deteriorate, suggesting weak upside given the slow buying momentum. Nevertheless, a more concerted window-dressing effort by local funds during the last trading week for the year will be essential to boost upside potential going forward. Otherwise, expect the index to extend sideways trading ahead of the year-end.

Immediate support is revised lower to 1,254, the 61.8 per cent Fibonacci Retracement (FR) of the uptrend from the 1,233 pivot low of November 2 to the November 17 high of 1,288. Stronger support platforms are at the November 30 pivot low of 1,248, which must hold to prevent further downside risk towards the 1,233 pivot low of November 2. A sustained close above the 50-day moving average support, now at 1,263, will be crucial to support the up-trend since March. On the upside, expect immediate resistance at 1,267, the 38.2 per cent FR, then 1,275, the 23.6 per cent FR level, with 1,280 and the November 17 pivot high of 1,288 as subsequent tougher hurdles.

Chart-wise, banks such as AMMB, CIMB, Maybank and Public Bank should attract more buyers as the year 2009 ends and 2010 begins. Telco stocks Axiata and TM should attract buyers on any dips towards the RM2.90 support, while lower liners extend consolidation on low volume. Meantime, oil & gas-related stocks should see buyers returning again after crude oil prices bounced back, with Dialog, Kencana, SAAG, SapuraCrest and Scomi Group likely to benefit.

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