News Column

Upside momentum likely to return

February 16, 2014

Kaladher Govindan



STOCKS sustained gains for a sixth straight session to lift the local benchmark index to a one-month high last week, fuelled by regional strength due to China's upbeat January trade data, dovish comments from the new United States Federal Reserve (Fed) chief in her maiden testimony to Congress, and an extension of the US debt ceiling for another year.

In spite of an overbought profit-taking correction on Thursday, buyers returned to bargain on Friday as investors looked past weaker US economic data caused by adverse weather conditions to a recovering global economy.

Small-cap and penny stocks were keenly sought by retailers to outperform blue chips with robust trading momentum contributing strong percentage gains.

Week-on-week, the FTSE Bursa Malaysia KLCI (FBM KLCI) climbed 10.78 points, or 0.6 per cent, to 1,819.37, with gains on Tenaga (+26sen), IOI Corp (+20sen) and MISC (+29sen) offsetting losses on BAT (-RM1.60).

Average daily traded volume and value increased to 2.4 billion shares and RM2.06 billion, compared with 1.62 billion shares and RM2.01 billion, respectively, in the previous week, with the volume increase fuelled by strong trading momentum on low-priced stocks.

Stronger retail participation is likely to sustain interest in small- cap and penny stocks this week, while blue chips consolidate but case for further upside remains in the next two weeks should the index heavyweights outperform market expectations in their fourth-quarter 2013 results.

Among the lower liners, Iris Corp has been in the limelight this year for various reasons and has chalked up an impressive capital gain of 75 per cent year-to-date and 216.1 per cent in the last 52 weeks. The emergence of Federal Land Development Authority (Felda) as a major shareholder via a wholly-owned subsidiary has invited a lot of speculations about Iris' future business prospects and shareholding structure.

The interest is likely to linger on with the impending transfer of the company to the Main Market, potentially this quarter, more contract flows from Felda and the impending announcement of a contract to manage Malaysia's Tourist Refund Scheme, which it has bid together with Swiss-based partner Global Blue, as the entire system should be ready for rollout by this July.

On the domestic economic front, the CPI for January, to be released this Wednesday, is likely to fall within consensus expectations of 3.3 per cent. With the real interest rate hovering in a negative territory, rising inflationary pressures could to lead speculations about the central bank's timing of the next rate rise.

Considering that this cost- push inflation will take a while to cast its secondary spell on demand (as wages did not increase at the same rate as other input prices), Bank Negara Malaysia is in no hurry to tweak its policy rate, in this column's view. Besides, it may opt to refrain from meddling with interest rates in the short term as the current weakness in the ringgit is positive for exporters.

Externally, the US housing data (housing starts, building permits and existing home sales), US PMI and the details of Fed's January meeting minutes will be closely followed this week. Weather-related issues are expected to dampen most housing related statistics but they are expected to fall within market expectations. Thus, they may not cause any setbacks on market sentiment or derail the Fed from keeping to its pace of cuts in monthly asset purchases.

Technical Outlook

Spot month February KLCI futures contract traded on Bursa Malaysia Derivatives Bhd added 6.5 points, or 0.36 per cent to 1,816.5 week-on-week, reverting to a 2.9-point discount to the cash index, compared with the minor 1.4-point premium the previous Friday.

Bursa Malaysia shares rose on Monday, in line with regional gains as investors looked ahead of the weaker US jobs data the previous Friday as a temporary reprieve to further improvement in the global economy. The FBM KLCI added 7.55 points to close at 1,816.14, off an opening low of 1,812.29 and high of 1,819.99, as gainers led losers 530 to 267 on total turnover of 1.94 billion shares worth RM1.86 billion.

Blue chips sustained strong gains the next day, lifting the benchmark index to a one-month high encouraged by strength in global markets, while lower liners, specifically oil and gas stocks, rallied on contracts flow speculation. The index climbed another 8.03 points to settle near session highs at 1,824.17, off an opening low of 1,815.57, as gainers beat losers 494 to 314 on robust turnover of 2.71 billion shares worth RM2.34 billion. The local market extended gains for a fifth trading session on Wednesday, shored up regional strength due to China's upbeat January trade data and extension of the US debt ceiling, but upside was checked by profit-taking. The FBM KLCI added 1.47 points to close at 1,825.64, off an early high of 1,826.73 and low of 1,821.75, as gainers edged losers 421 to 398 on steady trade totalling 2.46 billion shares worth RM2 billion.

Stocks fell for correction the following day, as investors took profits due to overbought conditions after the market rose for the sixth straight trading session. The index lost 8.49 points to end at 1,817.15, off an early high of 1,828.72 and low of 1,816.22, as losers beat gainers 483 to 318 on total volume of 2.52 billion shares worth RM2.08 billion.

Stocks bounced back from early weakness on Friday, as buyers returned to bargain following shallow profit-taking dips as investors looked past weaker US economic data due to adverse weather conditions to a recovering global economy, with small-cap and penny stocks dominating trade.

The index recouped 2.22 points to settle at 1,819.37, off an early low of 1,813.90 and high of 1,820.38, as gainers led losers 525 to 273 on total trade of 2.36 billion shares worth RM2.01 billion.

Trading range for the local blue-chip benchmark index shrank to 16.43 points last week, compared with the large 42.38 points range the previous week, after profit-taking interest in blue chips increased to cap upside, following a sixth straight session of gains.

For the week, the FBM-Emas Index rose 103.74 points, or 0.83 per cent, to 12,584.24, while the FBM-Small Cap Index surged 575.64 points, or 3.61 per cent, to 16,531.61, as small-cap stocks enjoyed strong rallies on heavy rotational interest.

The trigger line on the daily slow stochastic indicator for the FBM KLCI has hooked down in the overbought zone, but the weekly indicator's signal line has leveled off in the lower neutral zone, suggesting reducing downward momentum. The 14-day Relative Strength Index (RSI) indicator rose to a higher reading of 52.86 as of last Friday, while the 14-week RSI strengthened to a higher reading at 55.79.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) indicator's signal line has expanded positively after flashing a buy early last week, but the weekly MACD indicator signal line's sloping downtrend has yet to reduce significantly. On the 14-day Directional Movement Index (DMI) trend indicator, the +DI and -DI lines expanded positively after crossing for a buy signal the previous week.

Conclusion

With most technical indicators for the FBM KLCI improving substantially following the past two week's recovery, upside momentum should return to aid a resumption of the longer-term uptrend. Note that trading momentum on the small-cap and penny stocks space should stay robust to sustain active rotational interest in stocks with positive news flow, while blue chips stage healthy consolidation.

In the meantime, the much improved external sentiment with outlook for sustainable global growth should provide strong cushion during profit-taking corrections.

On the FBM KLCI, immediate resistance would be at 1,825 points, the 50-day moving average, and next at 1,830, the 23.6 per cent Fibonacci Retracement (FR) of the upswing from 1,660 low of August 28 2013 to the 1,882 record high of December 31 2013, followed by the upper Bollinger band at 1,835. 1,860, the 123.6 per cent Fibonacci Projection of the rally from 1,660 low of August last year to the October high of 1,822, will be the next significant resistance

Immediate support comes from 1,809, the 100-day moving average, then next at 1,797, the 38.2 per cent FR, followed by strong cushion from the critical 200-day moving average uptrend support now at 1,786.

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


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Source: Business Times (Malaysia)


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