BULLISH SIGNALS: Correction on Wall St last Friday expected to spill over to local front early this week
Bursa Malaysia shares managed to extend gains for a second week after initial caution over widespread predictions the United States Federal Reserve's two-day Federal Open Market Committee meeting would see a tapering of stimulus measures was proven wrong. Instead, buying momentum spilled over to the small caps and special-purpose acquisition companies (SPACs) space by the weekend, as Wall Street surged to record highs after the US central bank's surprising move not to cut back on its bond-buying programme.
As a consequence, the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) added 31.03 points, or 1.75 per cent, to 1,801.83 week-on-week, with CIMB (+51 sen), Maybank (+18 sen), DiGi.com (+17 sen) and SapuraKencana Petroleum (+17 sen) accounting for more than half of the index's gains. Average daily traded volume and value increased to 1.82 billion shares and RM2.1 billion, compared with 1.55 billion shares and RM1.87 billion respectively, the previous week.
The Fed had the opportunity to play along with market expectations and start cutting the monetary stimulus in its September meeting but it chose to delay the inevitable by blaming it on weaker-than-expected economic data, especially from the labour market.
The knee-jerk reaction that drove the Dow Industrial to a new high and spilling over to other global markets could fizzle out as soon as we approach October. Worries about the implication of US debt impasse will resurface in the coming weeks with the US slated to hit its US$16.7 trillion (RM52.77 trillion) debt limit in mid-October. Apparently the US government will only have US$50 billion, which may last for only a few days when the tap runs dry. Inability to borrow and meet its financial obligations will lead to a default.
Adding to the uncertainty is end-September deadline to renew regular funding for government operations, failing which raises the risk of a shutdown. Recall that such an impasse led to a downgrade in the US credit rating to AA+ by Standard & Poor's on August 5 2011 and it had negative implications on equity markets. As usual the Democrats and Republicans are expected to find an amicable solution at the 11th hour but the period leading to this agreement could be choppy, all the more with Dow trading at new highs.
On the local front, trading today could see some profit-taking consolidation on blue chips after the unexpected surge in share prices last week. Any immediate-term correction is healthy to sustain the rebound momentum and the local funds could come to the aid by nibbling at lower levels. The retail interest in small caps last week could continue to spill over to other SPACs and undervalued counters in the oil and gas, construction and property sectors as investors anticipate more positive domestic news flows ahead of the Umno elections on October 19 and tabling of the 2014 Budget on October 25. To begin with, no contest for the top two Umno posts came within expectations and is a good start to strengthen the party from within.
On the economic front, no major data is due this week except for foreign reserves that could reflect the return of portfolio funds. In the US, the PMI, housing second quarter gross domestic product and core inflation data could shed some light on the next Fed action. Technical Outlook
Spot month September KLCI Futures contract traded on the Bursa Malaysia Derivatives Bhd climbed 27 points, or 1.5 per cent last week to 1,792, increasing its discount to cash 9.8 points from 5.3 points discount the previous Friday, as the futures market undertone stayed bearish near term given uncertainty over the upside resilience of the cash index.
Blue chips fell from early highs last Tuesday due to profit-taking on recent gains and caution ahead of the US Fed two-day policy meeting, as a reduction in stimulus was widely expected. Still the KLCI ended 4.14 points up at 1,774.94, off an early high of 1,781.47 and low of 1,769.12 as gainers led losers 443 to 308 on cautious trade of 1.5 billion shares worth RM1.75 billion.
Stocks fell the next day on profit-taking due to caution ahead of the US Federal Reserve's FOMC policy meeting on stimulus reduction. The KLCI slid 3.54 points to 1,771.40 after oscillating between a high of 1,774.78 and low of 1,769.69 as gainers edged losers 405 to 312 on slow trade totalling 1.43 billion shares worth RM1.48 billion.
Blue chips led the rally on Thursday, sparked by overnight gains on Wall Street to record highs after the Fed's surprising move not to cut back on its bond-buying program-me. The KLCI gapped sharply higher before closing 21.51 points, or 1.2 per cent, up at 1,792.91, off an early low of 1,787.38 and high of 1,793.94 as gainers swarmed losers 701 to 162 on strong volume totalling 1.94 billion shares worth RM2.73 billion.
The local market extended gains ahead of the weekend after heavily sold down blue chips such as CIMB and RHB Capital recovered further ground, boosted by the US central bank's decision to sustain stimulus measures with buying momentum spilling over to the small caps' and SPACs' space. The index climbed another 8.92 points higher to close the week at 1,801.83, off an early low of 1,794.89 and high of 1,805.15, as gainers led losers 445 to 349 on robust volume totalling 2.4 billion shares worth RM2.44 billion.
Trading range for the local blue-chip benchmark index shrank to 36.03 points last week compared with the 53.13 points range the previous week. The FBM-Emas Index added 219.83 points, or 1.8 per cent last week to 12,494.22, but the outperformer was the FBM-Small Cap Index which surged 516.38 points, or 3.5 per cent, to 15,356.78, as small cap stocks, especially SPACs, rallied strongly in the later part of the week.
The daily slow stochastic indicator for the FBM KLCI stayed level deep in the overbought zone, but the weekly indicator's triggered a fresh buy signal, promising further medium-term upside. The 14-day Relative Strength Index (RSI) indicator climbed higher for a bullish reading of 67.76 as of last Friday, while the 14-week RSI ascended to a firmer reading of 62.10.
As for trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line climbed above the mid-point to reinforce a stronger uptrend, while the weekly MACD signal line has hooked up to promote bullish momentum ahead. The 14-day Directional Movement Index (DMI) trend indicator's +DI and -DI lines registered bullish expansion on a climbing ADX line, suggesting a return to uptrend mode and an end to the recent correction phase. Conclusion
All the key technical momentum and trend indicators for the FBM KLCI are flashing bullish signals to reinforce a V-shape rebound, but the grossly overbought daily slow stochastics indicator implies profit-taking correction potential this week.
Moreover, the profit-taking correction on Wall Street last Friday due to the "irrational exuberance" when investors bid up stocks to record highs should spill over to the local front early this week. Investors should also be hesitant on the disagreement over expanding the debt limit by the US government.
The strong V-shape rebound on the FBM KLCI should have mostly discounted the unexpected decision by the US central bank to cut back on its US$85 billion monthly bond purchases. Hence, a period of profit-taking consolidation is likely to ensue. As such, immediate resistance for the index remains at the expanding upper Bollinger band at 1,805, matching last Friday's high, with stronger hurdles at the July pivot high of 1,811, and subsequently the all-time high of 1,826.
Going forward, a confirmed breakout of this high would target 1,880, which represent the 123.6 per cent Fibonacci Projection (FP) level. Immediate support on a profit-taking pull-back will be at 1,772, the 23.6 per cent Fibonacci Retracement (FR) level of the February 7 low of 1,597 to the all-time high of 1,826, followed by 1,766, the current 100-day moving average level, and next at 1,738, which is the 38.2%FR level.
On stock picks, blue chips such as AirAsia and CIMB are expected to further reverse the severe selloffs by foreign funds, but gaming stocks Genting Bhd and Genting Malaysia may meet profit-taking resistance on overbought technicals.
As for lower liners, construction stocks Binapuri and TRC Synergy should underperform on bearish technicals, while oil and gas-related stocks Alam Maritime and Muhibbah Engineering should enjoy further upside on contract optimism.The subject
expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.