Sentiment on KL bourse to remain weak

HEAVY falls in key telco stocks TM and TM International, sparked by fears that the group's high dividend payout policy won't be repeated in future years, and in Maybank due to weaker earnings outlook for the banking industry next year contributed to almost all of the benchmark Kuala Lumpur Composite Index's (KLCI) losses last week. The KLCI lost 12.3 points, or 1.4 per cent, week-on-week to close at 881.65, as daily average trading volume dwindled to 819.7 million shares from 891.5 million shares in the previous week.

Apart from the above factors, the local stock market also succumbed to external pressures as last week's trading pattern portrayed the return of risk aversion appetite among global investors after the release of some hard economic data in the US, Europe and China that retriggered anxiety about the health of the world economy.

The US showed worrying trends in its automotive sector, slowing retail sales and continued rise in its budget deficit, the eurozone confirmed that it is in recession and China witnessed its slowest expansion in industrial output in seven years. There are signs of easing house prices and retail sales in China, which sowed doubt on its ability to maintain double-digit economic growth. The US government added to the woes when it made an about-turn from its decision to save toxic mortgage assets in favour of recapitalisation of the financial system and expansion of consumer credit.

Although technical indicators are pointing towards a mixed week on the local bourse, favourable economic data and expectations on policy decisions could provide some boost to the market. The Malaysian foreign reserves and Consumer Price Index figures will be released this week. It is no secret that the continued deleveraging activities among foreigners and the outflow of hot money will weigh on the reserves number. The October CPI figure scheduled for release on Friday will shed more light on Bank Negara Malaysia's stance on its Overnight Policy Rate when its policy-making committee meets on November 24.

The CPI could ascertain further easing in inflationary pressures and it will be more visible in the next two months when it captures the full impact of recent fuel price cuts and price reduction by hypermarkets and other retailers. Thus, there is a 50:50 chance that the central bank will cut rates by at least 25 basis points next week, and if not, the probabilities are high that it will do so before the year ends as the recent weak industrial production numbers necessitate a confluence of policy measures to sustain expansion next year.

Externally, the outcome of the G20 summit in Washington is not likely to have any impact on global markets as no decisive actions were taken to combat the economic malaise. Something more conclusive can be ironed out when it meets next April. The US will release its CPI, leading indicators and housing starts data this week that may have some bearing on global markets.

Technical outlook

The local stock market rose on Monday, shored up by China's near US$600 billion (US$1 = RM3.59) economic stimulus plan to counter the global credit crisis, lifting the KLCI up to an intra-week high of 905.33. However, the worsening profit outlook for companies globally overshadowed China's stimulus package on the next day, dragging local stocks lower. Things worsened on Wednesday, as a sell-off in TM because of uncertainty over the telco's ability to sustain handsome dividend payouts, and in Zelan on fears over a collapse in earnings given the very challenging local construction market, depressed sentiment.

The situation deteriorated the next day, after overnight US stocks tumbled, pressured the KLCI to an intra-week low of 873.78 prior to a late rebound aided by rally in TM shares after the company assured investors that its high dividend payout policy was intact. The bullish reversal in overnight US stocks last Thursday, with the Dow Jones Industrial Average reversing a 317-point intra-day loss and closing 552 points or 6.7 per cent higher, helped the market rebound ahead of the weekend, but liquidation of short-term trading positions by retailers as contra positions fell due dampened sentiment in lower liners.

The daily slow stochastic indicator for the KLCI has fallen to the neutral region following last week's correction (Chart 1), but the weekly indicator issued an early buy signal from the oversold position. Meantime, the 14-day Relative Strength Index (RSI) indicator levelled with a reading of 40 points as of last Friday's close. The 14-week RSI hooked down again in the oversold region with a reading of 24, suggesting weakening market momentum.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) showed less upside bias due to a weakening upward gradient, but the weekly MACD indicator levelled off further, implying downside momentum is waning. The 14-day Directional Movement Index (DMI) sustained its weak downtrend signal, while the -DI and +DI lines on the 14-week DMI contracted to suggest the current bearish medium-term trend is weakening.

Technical outlook

The tumble in US stocks last Friday, pressured by a record slump in retail sales and the forecast by top seller of mobile phones Nokia Oyj which predicted that global shipments will shrink significantly next year, should filter through to dampen sentiment on the local stock market this week. As such, investors should continue to be cautious and adopt a "buy on dips and sell on rallies" strategy, as global financial markets will suffer extremely volatile trading given uncertainties over the depth and length of a global recession going into next year. Sector-wise, however, while blue chips are expected to remain weak on low volume, momentum trades should dominate in lower liner penny stocks and continue to highlight active retail participation in coming weeks.

Given the failure of the KLCI to close above 888 last Friday, a re-test of the previous Friday's low of 869 is imminent early this week, with a breakdown to accelerate any fall towards the stronger support at 849, mirroring the 61.8 per cent Fibonacci Retracement (FR) of the bear market rally from the 801 pivot low of October 28 to the 926 high. On the upside, resistance is revised lower to 888, with next immediate resistance at the psychological 900 level. The 920 level, which represents the 61.8 per cent FR of the upswing from 548 low of April 2001 to the all-time high of 1,525 in January this year, should act as a formidable hurdle. The next upside hurdle is seen at 940, representing the 38.2 per cent FR of the downswing from 1,164 high of July 3 to the recent October 28 pivot low of 801.

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