Investors should sell on strength core blue-chip heavyweights and switch to accumulate Main Board lower liners, says a head of research.
THE local stock market staged a rebound from the recent seven-week correction triggered by election jitters, boosted by strong regional gains last week on improving economic data and the nomination of a pro-stimulus head for the Bank of Japan, increasing hopes for faster growth prospects.
Assurance from the United States Federal Reserve chairman that stimulus measures will be maintained to stimulate growth also supported sentiment.
Week-on-week, the FBM KLCI climbed 15.36 points, or 0.95 per cent, to 1,637.44, with Public Bank (+36sen), CIMB (+19sen), Petronas Chemicals (+18sen) and UMW Holdings (+64sen) offsetting losses on IOI Corp (-18sen) and Petronas Dagangan (-17sen). Average daily traded volume and value slipped to 887 million shares and RM1.55 billion respectively, compared with the one billion shares and RM1.4 billion average the previous week.
The benchmark index is poised to gain further ground this week as local funds latch on the Dow's resilience last week to prop up the index a notch higher. The Dow gained 35 points to close at 14,089 last Friday despite the deadline to implement the automatic spending cuts (also known as sequestration measures) in the US that will see US$85 billion reduction in government spending over the next seven months for fiscal year ending September 2013 and subsequent cuts over the next nine years totalling to US$1.2 billion. The move to curb spending is a prerequisite to allow the nation to increase its debt level to close the gap in budget deficits.
Investors could have discounted the impact as the US$85 billion only accounts for about 2.4 per cent of full year's spending of US$3.55 billion as they turned upbeat on a slew of improving economic data, ranging from housing indicators, manufacturing and consumer spending, to cushion the negative impact of sequestration on the US gross domestic product.
The fact that the US Federal Reserve chairman also reaffirmed and defended the Fed's policy of aggressive bond-buying of US$85 billion a month kept positive market sentiment alive.
Keeping interest rate near zero as long as the unemployment rate is above 6.5 per cent and inflation is below 2.5 per cent will ensure ample liquidity in the market that bodes well for housing market, consumption and risky asset classes.
As unemployment rate was at 7.9 per cent in January and consumer prices, as measured by the Fed's preferred gauge, rose only 1.2 per cent year-over-year, there is no real danger of this ultra-easing to be concluded in the short term. As such, the ample liquidity could target attractive external markets if there is any subsequent knee-jerk reaction in the US economy in the coming months after the implementation of sequestration. Malaysia could be a likely target once the election overhang is over.
On the domestic front, investors could be relieved that there were no negative surprises in the recently concluded earnings season. The results season was broadly within expectations with companies that have recorded earnings within estimate rose slightly to 59 per cent from 58 per cent in the third quarter of 2012. All in, fourth-quarter calendar year (CY12) core earnings grew by 4.2 per cent quarter-on-quarter, a reversal from 0.9 per cent contraction in the preceding quarter. Cumulatively, CY12 core earnings grew by 14.7 per cent to RM59.9 billion versus expectations of 11.9 per cent.
Bulk of the growth is attributable to the power and transportation sectors. Looking ahead, CY13 earnings are forecast to grow by a slower 10.8 per cent on a calendarised basis as the public-listed players face the impact of not-so-exciting prospects from external markets.
There is no change in investment strategy as investors should take a more conservative approach and sell over-valued blue chips before the dissolution of Parliament and buy back post-dissolution but before the general election. Despite the correction from the recent FBM KLCI peak, most blue chips, particularly in the defensive sectors, such as consumer and telco, are still trading pricey valuations. Sectors that investors should "overweight" are oil and gas, construction, property and power.Technical Outlook
New spot month March KLCI futures contract traded on the Bursa Malaysia Derivatives Bhd rose 13.5 points, or 0.8 per cent, at 1,630.5 for a larger 6.9-point discount to the cash index, compared to the 5.1-point discount the previous week.
Blue chips led by Maybank, TM and Public Bank staged a rebound on Monday, propped up by oversold conditions and mild bargain hunting interest.
The KLCI ended up 5.27 points at the day's high of 1,627.35, off an early low of 1,619.97, as gainers mildly edged losers 326 to 296 on moderate trade of 850.5 million shares worth RM1.41 billion.
The local market retraced the next day, dampened by regional weakness amid concerns on further property curbs from China and uncertainties over the outcome of elections in Italy that was worsening the eurozone debt crisis.
The KLCI eased 3.17 points to settle at 1,624.18, off an afternoon low of 1,622.47, as losers edged gainers 339 to 311 on moderating trade of 801.3 million shares worth RM1.36 billion.
Stocks were stuck in range-bound trade on Wednesday, with most investors sidelined, given the mixed regional tone and cautious sentiment ahead of the general election.
The KLCI ended flat at 1,624.14, after oscillating between high of 1,627.07 and low of 1,623.92, as gainers led losers 349 to 303 on improved trade totalling 896 million shares worth RM1.55 billion.
Blue chips led by banks staged recovery the following day, helped by strong regional gains on improving economic data and nomination of a pro-stimulus head for the Bank of Japan, boosting hopes for faster growth.
The KLCI surged 13.49 points to settle at the day's high of 1,637.63, as gainers led losers 394 to 283 on better volume of 1.01 billion shares worth RM1.97 billion.
The local market ended mixed last Friday, as profit-taking interest picked up steam ahead of the weekend following the strong session the previous day. The benchmark index finally closed flat near session lows at 1,637.44, off an early high of 1,640.6, as gainers edged losers by 362 to 272 on reduced total turnover of 877.9 million shares worth RM1.45 billion.
Trading range for the local benchmark index last week contracted to 20.63 points, compared to the 29.97 points range the previous week. For the week, the FBM-Emas Index gained 121.76 points, or 1.1 per cent, to 11,144.27, while the FBM-Small Cap Index added 126.14 points, or 1.11 per cent, to 11,519.72.
The daily slow stochastic indicator for the FBM KLCI has risen into the overbought zone following last week's rebound, while the weekly indicator's signal line staged an initial hook-up, suggesting recovery potential.
The 14-day Relative Strength Index (RSI) momentum indicator has recovered to a bullish reading of 52.78, while the 14-week RSI hooked up for a more positive reading of 49.98.
The daily Moving Average Convergence Divergence (MACD) signal line has recovered to a more constructive position after flashing a buy signal last week, but the weekly MACD indicator sustained its hook down to imply a bearish medium-term trend.
However, the 14-day Directional Movement Index trend indicator point to a potential trend reversal, provided further follow-through strength is sustained, as the +DI and -DI lines are contracting towards each other. A crossover will trigger a buy signal.Conclusion
Except for the weekly MACD indicator for the KLCI which maintained a bearish posture, all other momentum and trend indicators that being tracked are showing positive signals, suggesting further upside room in the immediate term. Still, there is a need for bullish confirmation from a significant increase in buying momentum, preferably to above 1.5 billion shares on daily basis, to support a sustainable uptrend ahead.
Immediate support for the index is revised upwards to 1,628, the 200-day moving average, followed by 1,613, the 50%FR of the 1,526 low of May 2012 to the 1,699 record high of January 2013 with 1,599 and 1,592, the 61.8%FR, acting as stronger support platforms.
Meanwhile, immediate resistance is upgraded to the overhead 50 and 100-day moving averages at 1,652 and 1,647 respectively, with 1,658, the 23.6%FR acting as a tougher hurdle.
As for stock picks, chart-wise, investors should sell on strength core blue-chip heavyweights and switch to accumulate or bargain Main Board lower liners such as Glomac, Hua Yang, MRCB, Time dotcom, UEM Land, DRB-HICOM, Dialog Group and Perdana Petroleum for medium-term gains.The subject
expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.