Signs of bottoming out emerge on Bursa

 

Core banking stocks AMMB, CIMB, Public Bank and RHB Capital are better buys on further weakness, says a head of research

THE Kuala Lumpur share market suffered losses for a second week, sparked by adverse sentiment on the external front given weaker-than-expected economic numbers from Australia and New Zealand, and fears certain European countries may default on their sovereign debt. The Moody's warning about increasing downward pressure on the US' triple-A sovereign credit rating and China's partial ban on its listed companies to make cash calls to repay debts and replenish working capital added to the woes.

The blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) slid 11.26 points, or 0.9 per cent, last week to end at 1,247.9, contributed by losses in Public Bank (-30.8 sen), CIMB (-24 sen), Sime Darby (-17 sen), Genting Bhd (-27 sen) and Tenaga (-10 sen). Daily average traded volume and value shrank to 883.2 million shares worth RM1.25 billion from 1.05 billion shares worth RM1.53 billion in the previous week.

Last week witnessed a few interesting corporate developments. Rin Kei Mei, a major shareholder of EON Capital, called for an extraordinary general meeting on February 22 to appoint eight new directors, supposedly friendly parties. The move is seen as a way to weaken Primus Pacific's influence on the board and push through the sale of EONCap to Hong Leong Bank. At Petra Perdana, an EGM concluded with the removal of its four board members who were replaced with members from another group.

These are positive signs of shareholder activism but there is a need to ensure that the welfare of minority shareholders is not shortchanged in the process as there is increasingly disturbing precedence that majors shareholders are making use of the loopholes in the legal system to their advantage. A classic example is the use of the Companies Act instead of the Merger & Takeover Code to take over a company as the former requires above 50 per cent approval compared with latter's 90 per cent.

More so if a takeover is initiated by the existing management of a company. The parties concerned must indicate what they intend to do with the proceeds from the sale, and not just issue a vague two-line statement. Legislators should review the laws so that the bar is raised for the benefit of minority shareholders

With only six days left to Chinese New Year (CNY), speculation about a festive rally will gather momentum as the days pass by. Data in the last two decades covering the 10 days before and after CNY show a favourable outcome where index gained 70 per cent of the time with an average index gain of more than 3 per cent during the 20-year period. It was also apparent that February was the best performing month in the first quarter during the period which was followed by a less inspiring March.

This year there was ample negative news during the pre-CNY period that led to a 60-point correction in the FBM KLCI from its January peak of 1,308 points. It appears that much of the negative news has already been priced into the index and any further dampener would come mainly from the external front as there are no major announcements due locally.

February is the last month for Malaysian companies to report their results for the October-December period but many will do so only after Chinese New Year. Except for the plantation and the oil and gas sectors, the rest are expected to announce better earnings on a year-to-year basis.

Traders are advised to regard any price corrections as a buying opportunity to ride on the CNY rally and look for exit opportunities in March. For long-term investors there are still buying opportunities in Overweight sectors like banking, gloves, property, technology, building material and oil and gas sectors.

Technical outlook

The strong back-to-back triple-digit rally on the New York Stock Exchange's Dow Jones Industrial Average early last week helped the Kuala Lumpur stock market rebound from the previous week's selloff. However, upside potential was capped by weak follow-through buying momentum and investor caution after weak economic data filtered through from down under, increasing concern over an anaemic economic recovery in the region.

The FBM KLCI peaked at a high of 1,268.21 early Tuesday before tumbling to a three-month low of 1,247.46 by late Friday. The trading range last week shrank to 20.75 points, compared with the 44.36-point range in the previous week.

The daily slow stochastics indicator for the FBM KLCI remained in bullish mode following a buy signal from the oversold zone early last week, but the weekly indicator has triggered a sell signal from the overbought region. The 14-day Relative Strength Index has retreated to a low reading of 30.59, while the 14-week RSI fell sharply from the overbought region to register a neutral reading at 55.52.

Meantime, the daily and weekly Moving Average Convergence Divergence (MACD) trend indicators registered more bearish readings with their signal lines expanding sharply lower. As for the 14-day Directional Movement Index (DMI) trend indicator, the +DI and -DI lines expanded outwards on a steadily rising ADX line, implying a developing downtrend.

Conclusion

With technical indicators for the FBM KLCI signalling more bearish conditions, investors may expect further weakness this week. Nonetheless, the expected weak selling momentum will be a positive indicator, with buyers more willing to bargain in the absence of strong selling pressure. Moreover, the strong reversal from intra-day losses on Wall Street last Friday, encouraged by a sharp drop in consumer credit in December, a potential bailout of Greece and Spain by the European Union over the weekend and the drop in last month's US unemployment rate to a five-month low of 9.7 per cent should encourage buyers back into the market.

As such, last week's low of 1,247, which mirrors the 38.2 per cent Fibonacci Retracement (FR) of the uptrend from 1,154 low of August 19 last year to the recent peak of 1,308 of January 21 at 1,249, should be a significant immediate bottom for the FBM KLCI. In any case, any dip towards stronger support platform of the 50 per cent FR at 1,231, which is rather remote, will be a better buying opportunity for rebound gains ahead. As for the upside, expect immediate resistance from the 100-day moving average, presently at 1,258, with a breakout to see stronger resistance from the 50-day moving average at 1,275. The 30-day moving average at 1,282 would prove to be a more significant barrier.

Chart-wise, core banking stocks AMMB, CIMB, Public Bank and RHB Capital are better buys on further weakness towards their respective immediate support levels at RM4.60, RM12, RM11 and RM5; similarly for Sime Darby and Tenaga at RM8.10 and RM7.60. As for lower liners, the preferred technical picks are Supermax at RM4.80, Kinsteel at RM1.00, MRCB at RM1.30, UEM Land at RM1.40, Kencana at RM1.40 and SapuraCrest at RM2.30.

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