OVERBOUGHT POSITION: Blue chips, sell-on-fact trading and gains to record highs more prone to correction
Blue chips on Bursa Malaysia extended uptrend last week, lifting the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) to close at record highs, boosted by optimism the United States will delay paring stimulus following the weaker jobs data and stronger earnings. However, profit-taking due to overbought momentum and investors clearing trading positions ahead of the 2014 Budget announcement kept gains in check.
The FBM KLCI increased 19.98 points, or one per cent week-on-week to 1,817.57, with SapuraKencana Petroleum (+19 sen), Tenaga Nasional (+22 sen), Petronas Gas (+80 sen) and CIMB (+10 sen) contributing almost half of the index’s gain. Average daily traded volume and value improved to 1.72 billion shares and RM1.68 billion, compared with the 1.54 billion shares and RM1.68 billion average respectively the previous week.
The government has kept to its commitment of fiscal austerity without sacrificing economic growth when it outlined the 2014 Budget. It is a good budget. The only 0.3 per cent year-on-year rise to RM262.2 million in total government spending does not impede progress as the government still projects a healthy gross domestic product expansion of 5.0 per cent to 5.5 per cent next year with strong private-sector participation.
Nonetheless, the rising allocation for operating expenditure vis-à-vis development expenditure is a concern and should be addressed by trimming overlapping agencies. It was at 78.2 per cent of total expenses in 2008 but has risen to 83 per cent next year at the expense of development expenditure.
No major surprises in 2014 Budget as measures like the goods and services tax (GST), cut in sugar subsidies and harsh measures to curb property market speculations came within market expectations. Cut in corporate tax and individual income tax should not cause excitement as it was an “after effect” to compensate for the six per cent value added tax.
Telcos will be one of the beneficiaries as they may no longer need to absorb the current six per cent services tax imposed on prepaid subscribers. DiGi and Maxis are the biggest winners in relation to their prepaid contributions.
Manufacturers should benefit too. Construction players will benefit from government spending on infrastructure projects.
The absence of any drastic subsidy cuts, except for the 34 sen in sugar subsidies, removed the short-term downside pressure on corporate earnings. However, that does mean the electricity tariff and gas price hikes are off the radar.
After much delays, the expected increase in energy prices could finally materialise in 1Q14 as the government addresses the issue once and for all with the implementation of the fuel cost pass through mechanism under the proposed incentive-based regulation tariff framework.
So, if there is any correction in Tenaga Nasional Bhd’s share prices due to the missing link, it should be a buying opportunity.
The cut in sugar subsidies will only have a very minor impact on Felda Global Ventures (FGV) as contributions to bottom line from sugar businesses are minimal (impacts on FY13 and FY14 net profits were -1.0 per cent and -1.2 per cent respectively). As such, buy FGV on price weakness. Share prices of property stocks have already discounted the news and any further weakness should be an opportunity to accumulate as real-estate prices should rise with the onset of GST.
The increase in Real Property Gain Tax (RPGT) does not impede purchasing power but merely lowers future profits. Expectations of higher prices will offset lower profits from RPGT but the real impact will only be felt when interest rates rise to a level that would hurt disposable income. We may not see that level until in the later part of 2015. So, make hay while the sun shines.
As for the benchmark index, valuations appear rich and the recent run-up to 2014 Budget subjects it to profit-taking corrections. Technical Outlook
Spot month October FBM KLCI futures contract traded on the Bursa Malaysia Derivatives Bhd added 15.5 points, or 0.9 per cent last week to 1,814, slipping to a 3.6-point discount to cash, compared with the 1.1-point discount the previous Friday as profit-taking and selling increased, given the more overbought technical position.
Bursa Malaysia shares extended sideways trading on Monday as early profit-taking due to overbought conditions alternated with mild buying interest amid firmer regional markets.
The FBM KLCI ended 3.02 points up at 1,802.61, off an early high of 1,803.46 and low of 1,797.14, as gainers led losers 434 to 287 on total trade of 1.75 billion shares worth RM1.38 billion.
Blue chips closed flat the next day, with the benchmark index slipping from a fresh three-month high as investors stayed aside pending release of the delayed US jobs data for clues on when the Federal Reserve will start trimming stimulus.
The FBM KLCI ended 0.97 points higher at 1,803.58, off an early high of 1,808.35 and low of 1,800.46, as gainers marginally edged losers 390 to 387 on steady trade of 1.85 billion shares worth RM1.82 billion.
The surge on blue chips on Wednesday, fuelled by hopes for extended US stimulus following the weaker-than-expected jobs data, lifted the benchmark index to close at a record high, with SapuraKencana, Genting Bhd and Tenaga leading gains.
The FBM KLCI rose 10.53 points to settle at 1,814.11, off an opening low of 1,805.64 and high of 1,817.93, as gainers led losers 474 to 330 on total trade of 1.71 billion shares worth RM2.12 billion.
Blue chips extended gains the following day, lifting the FBM KLCI to close at another record high on hopes the 2014 Budget could hold bullets to boost economic growth. The index added 4.82 points to settle at 1,818.93, off an early low of 1,817.41 and high of 1,822.17 but losers beat gainers 420 to 345 on slower trade totalling 1.52 billion shares worth RM1.66 billion.
Stocks gave back earlier gains on Friday as overnight strength on US stocks due to stronger earnings and stimulus optimism was overshadowed by profit-taking due to overbought momentum and investors cleared trading positions ahead of the 2014 Budget announcement.
The index shed 1.36 points to end at 1,817.57, off an early high of 1,820.81 and low of 1,812.47 as losers narrowly edged gainers 385 to 380 on higher trade totalling 1.76 billion shares worth RM1.42 billion.
Trading range for the local blue-chip benchmark index expanded moderately to 25.03 points last week, compared with the 20.24 points range the previous week, as profit-taking interest checked upside on blue chips. The FBM-EMAS Index added 105.25 points, or 0.84 per cent to 12,636.42 for the week, while the FBM-Small Cap Index gained 164.65 points, or 1.06 per cent to 15,759.45.
The daily slow stochastic indicator for the FBM KLCI has risen up into the grossly overbought region, suggesting higher probability for correction, which is reinforced by the similarly excessive overbought position on the weekly indicator. The 14-day Relative Strength Index (RSI) indicator climbed up for an initial overbought reading of 72.00 as of last Friday, while the 14-week RSI rose to a higher reading of 63.36.
On the other hand, the daily Moving Average Convergence Divergence (MACD) trend indicator sustained its bullish expansion against the signal line, while the weekly MACD has just crossed over to trigger a fresh buy signal. The 14-day Directional Movement Index (DMI) trend indicator’s +DI and –DI lines expanded further on a recovering ADX line, but the indicator remained in non-trending mode.Conclusion
With the daily and weekly stochastics for the FBM KLCI now in grossly overbought position, blue chips are more likely to fall for profit-taking correction this week, with the gains to record highs more prone to an overbought correction. The sell-on-fact trading mentality should also encourage correction as the recent surge to record highs would have discounted most of the optimism over 2014 Budget.
As such, any further rally to the May 6 record intra-day high of 1,826, and next hurdle at 1,850 should meet strong profit-taking resistance in the immediate term. Upon a profit-taking pullback, immediate uptrend supports are at 1,801, 1,786 and 1,766, which are the respective 10-, 30- and 50-day moving averages. The subject
expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.