PROFIT-TAKING CORRECTION?: Investors are set to stay sidelined pending Fed policy meeting
Better-than-expected economic data from major global economies and easing geopolitical tensions over Syria sparked a rally on blue chips early last week, lifting the benchmark FBM Kuala Lumpur Composite Index (FBM KLCI) to a three-week high before profit-taking checked gains ahead of the Malaysia Day weekend.
For the week, the FBM KLCI climbed 47 points, or 2.73 per cent, to 1,770.8, with gains on CIMB (+38 sen), Genting Bhd (+61 sen), Public Bank (+32 sen), Axiata (+17 sen) and Genting Malaysia (+27 sen) accounting for about 43 per cent of the index's rise. Average daily traded volume and value increased mildly to 1.55 billion shares and RM1.87 billion compared with the 1.32 billion shares and RM1.52 billion, respectively, the previous week.
Prime Minister Datuk Seri Najib Razak announced last Saturday that the newly minted Bumiputera Economic Council will focus on five strategies to give more clout to Bumiputera economic empowerment agenda. The announcement that came as a reward for strong Bumiputra support in the last 13th general election can be construed as setting the right pace to get the ball rolling before the Umno election on October 19 2013.
While investors should read this as a positive sign for a market rally in the run-up to election, as was the case during the last Umno party election in 2009, investors' appetite in the immediate term could be suppressed by the impending outcome of the US Federal Reserve's meeting tomorrow and on Wednesday.
There has been much speculation surrounding the Fed's bond tapering, potentially beginning this month, after chairman Ben Bernanke expressed last May that the central bank could do so later this year if economic conditions warrants. Consensus expectations point to between US$10 billion (RM32.9 billion) and US$15 billion cut in the US$85 billion monthly purchases of US treasuries and mortgage-backed securities.
A decision that falls in line with expectations should have minimal impact on the market while anything to the contrary could cause a knee-jerk reaction as the fresh liquidity has sustained long-term rates at low level and helped fuel strong rally in the global equity markets.
Besides, anticipate some volatility in the United States markets on Friday due to "triple witching" as traders rush to cover their positions. Triple witching is an event that occurs on the third Friday of the final month of every quarter when the contracts for stock index options, stock index futures and stock options expire on the same day.
As such, one can expect the FBM KLCI to trade sideways ahead of Wednesday (it would be Thursday here by the time we know it) in this holiday-shortened trading week. Any price weakening could provide opportunity to pick up undervalued Umno-related counters and those related to domestic expansion.
That aside, the Consumer Price Index for August to be released on Wednesday is expected to be tame, matching the previous month's two per cent, but it is expected to rise with the recent increase in fuel prices. While there is no pressing need for Bank Negara Malaysia to raise its three per cent Overnight Policy Rate this year, the pressure will increase as neighbouring countries raise their interest rate to defend their weakening currencies.Technical Outlook
Spot month September KLCI futures contract traded on the Bursa Malaysia Derivatives Bhd advanced 53.5 points, or 3.1 per cent, last week to 1,765, reducing its discount to cash to 5.8 points, from 12.3 points discount to the cash index the previous Friday, with the futures market undertone remaining bearish despite the strong rebound enjoyed on the cash index.
Bursa Malaysia's blue chips recovered strongly on Monday, fuelled by regional gains after Tokyo won the rights to host the 2020 Olympics, China's exports growth beat estimates and Australia's new conservative government boosted mining stocks. The KLCI surged 23.23 points, or 1.35 per cent, to end at the day's high of 1,747.03, off an opening low of 1,726.27, as gainers swarmed losers 568 to 171 on moderate trade totalling 1.28 billion shares worth RM1.6 billion.
Blue chips extended rally the next day, lifting the FBM KLCI sharply higher before profit-taking checked gains, as China's stronger-than-expected industrial production and retail sales data fuelled optimism for economic recovery. The index jumped another 17.92 points, or one per cent, to close at 1,764.95, off an opening low of 1,753.14 and high of 1,774.14, as gainers led losers 592 to 182 on improved total trade of 1.81 billion shares worth RM2.4 billion.
Stocks ended off earlier highs on profit-taking last Wednesday after the recent two-day rally, as investors discounted the good news from recovering economy in China and easing tensions in Syria. The KLCI closed 3.53 points up at 1,768.48, off an early high of 1,776.11 and low of 1,763.05, as gainers edged losers 403 to 384 on total trade of 1.99 billion shares worth RM2.23 billion.
Profit-taking weighed on early gains the subsequent day after investors discounted the positive sentiment from easing geopolitical tensions and China's improving economy. The KLCI rose 3.92 points to close at 1,772.4, off an opening high of 1,779.4 and low of 1,769.75, as gainers beat losers 417 to 292 on slower trade totalling 1.45 billion shares worth RM1.75 billion.
The local market fell for profit-taking consolidation ahead of the extended Malaysia Day weekend, with investors mostly sidelined amid uncertainty over stimulus tapering from the Fed in the closely watched Federal Open Market Committee (FOMC) meeting. The index slipped 1.6 points to end on Friday at 1,770.8, off an early low of 1,764.13, as losers edged gainers 391 to 300 on cautious trade of 1.23 billion shares worth RM1.38 billion.
Trading range for the local blue-chip benchmark index increased to 53.13 points last week, compared with the 25.37-point range the previous week, as blue chips staged strong rebound to lift the index up to a three-week high. The FBM-EMAS Index rose 317.23 points, or 2.65 per cent, last week to 12,274.59, while the FBM-Small Cap Index climbed 375.52 points, or 2.6 per cent, to 14,840.40.
After last week's strong rebound, the daily slow stochastic indicator for the FBM KLCI has climbed deep into the overbought zone, but the weekly indicator's signal line hooked up and is poised to trigger a buy signal. The 14-day Relative Strength Index (RSI) indicator also climbed up to register a bullish reading of 58.97 as of last Friday, while the 14-week RSI hooked up for a positive reading of 56.93.
The daily Moving Average Convergence Divergence (MACD) trend indicator climbed higher towards the neutral mark after flashing a buy signal the previous week, while the weekly MACD signal line is starting to level, suggesting reducing downward momentum. The 14-day Directional Movement Index (DMI) trend indicator's +DI and -DI lines have crossed over for a short-term buy signal, but the ADX line signalled a weaker trend.Conclusion
Save for the overbought daily slow stochastics indicator, which point to a likely profit-taking correction for the FBM KLCI this week, all other indicators that are currently being tracked have turned bullish and are suggesting a resumption of the prior uptrend. Nonetheless, most investors are likely to stay sidelined this week pending the FOMC policy meeting on the reduction of bond-buying, which will only be known on Thursday. In addition, lingering uncertainty over the geopolitical situation in Syria will continue to prevent firmer investor commitments.
On the index, immediate resistance stays at last Thursday's high of 1,779, with tougher resistance from the falling upper Bollinger band at 1,785. Stronger upside hurdles are at the August and July pivot highs of 1,801 and 1,811, respectively. On the flipside, immediate support on a profit-taking pullback will be at 1,738, the 38.2 per cent Fibonacci Retracement (FR) level of the February 7 2013 low of 1,597 to the all-time high of 1,826, followed by 1,712, the 50 per cent FR level, and next at 1,707, the current crucial 200-day moving average support level.
As for stock picks, the grossly oversold blue chip AirAsia is likely to stage technical recovery in the medium term, while Maybank should also recover in the longer term.
Meanwhile, second-liner property counters Glomac and Hua Yang look resilient and should outperform in the medium term, and oil & gas stocks should also reward investors with a longer term profit outlook.The subject
expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.