Signs of increased downside risk for KL bourse

Oil & gas related stocks such as Dialog Group and Perisai Petroleum would be good buying candidates on dips for longer-term gains, says a head of research.


THE local stock market slipped into profit-taking consolidation amid cautious sentiment last week, which saw only three days of trading due to the Hari Raya Aidilfitri holidays.

The shorter trading week stalled the three-week push by the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) to record highs. Uncertainty over possible further stimulus measures from the US and China amid weaker economic data contributed to the reduced investor participation and weak follow-through buying interest.

For the week, the FBM KLCI eased 1.57 points, or 0.1 per cent, to 1,648.22, with falls in DiGi.com (-11 sen), Genting Malaysia (-13 sen), IOI Corp (-5 sen) and Genting Bhd (-6 sen) overshadowing gains in Maybank (+12 sen) and UMW Holdings (+32 sen). Average daily traded volume and value improved marginally to 1.27 billion shares worth RM1.37 billion, compared to 1.23 billion shares and RM1.34 billion in the previous week.

The local market received a shot in the arm from US markets when it reopened last Wednesday. The S&P 500 index's sterling performance the day before, when it hit a more than a four-year high of 1,426 on better economic numbers and expectations of further monetary easing, resonated in Asian markets, including Malaysia's.

In fact, a firm belief in European leaders' ability to prevent the debt crisis from spreading and potential monetary easing measures in the US had contributed greatly in the rise of many global stock indices in the last three weeks. However, signs of lethargy after too long a wait are already visible.

Investors may choose to sit on the fence this week as they await more concrete clues from US Federal Reserve chairman Ben Bernanke's speech in Jackson Hole, Wyoming, this Friday. On the European front, nothing significant is expected to be achieved until the German verdict on the European Stability Mechanism on September 12, and rgw troika's final fact-finding mission to Greece in the same month before they address Greece's request to extend its fiscal adjustment programme by two years to 2016.

A point to note is that with its ?3.2 billion (RM12.5 billion) eurobond maturing in August, Greece has already warned that it may run out of cash within weeks. This could lead to some market jitters sooner than expected.

In the absence of any positive leads, expect the local benchmark index to remain in a consolidation mode with high risk of downside correction. The second quater results season enters the last leg this week with companies rushing to conclude their obligation before the National Day break this Friday. Most index-linked big caps have announced their results so far, which largely came within expectations, except for those mainly in the telco (Maxis, Telekom Malaysia and Axiata), gaming (Genting Bhd and Genting Malaysia) and plantation (IOI Corp, KL Kepong and Sime Darby) sectors.

Genting Bhd is expected to bear the brunt of Genting Singapore's weaker first-half 2012 earnings as it contributes more than half to its operating profit. Genting Malaysia is anticipated to face a setback in gaming volume growth as well, like its counterpart in Singapore. Besides, a lower win rate, hold percentage and potential cost overruns could undermine any possibilities of outperformance.

While telcos are expected to face some margin pressure due to stiff competition, their earnings are largely expected to fall within expectations.

While not anticipating any positive surprises from the first two sectors, plantation players IOI Corp and KL Kepong may disappoint investors on account of lower crude palm oil prices and fresh fruit bunch volume, and higher cost of production on a year-on-year basis.

Thus, do not expect the soon-to-be concluded earnings season to be a catalyst for the market this week. Investors are reminded to remain defensive and lock in their profits in overvalued counters such as BAT, Petronas Gas, Petronas Dagangan, Carlsberg, Nestle and Guinness.

Technical outlook

In FBM KLCI futures, however, the August contract traded on Bursa Malaysia Derivatives gained 3 points, or 0.18 per cent, last week to 1,648.5, reversing to a slight 0.3-point premium to the cash index, compared to the 4.3-point discount the previous week, as the contract converged as it approaches expiry this week.

Blue chips on Bursa Malaysia gained on Wednesday as investors returned to nibble after the long Hari Raya break, ignoring the weaker regional tone due to Japan's larger-than-expected trade deficit and caution ahead of eurozone finance ministers meeting on the Greek bailout package. The FBM KLCI edged 2.46 points up to close at 1,652.25, off a record high of 1,655.39, as gainers edged losers 399 to 379 on total volume of 1.35 billion shares worth RM1.62 billion.

Stocks slipped into profit-taking mode the following day, despite a rebound in the region on hopes the US is poised for more monetary easing and China may further reduce interest rates amid more signs of slowing economic growth. The FBM KLCI eased 0.64 point to settle at 1,651.61, off an early high of 1,655.24 and A low of 1,650.53, as losers beat gainers 419 to 305 on slower trade of 1.19 billion shares worth RM1.3 billion.

The local market staged a profit-taking correction on Friday, dampened by external weakness due to fading hopes for further stimulus from the US and China amid weaker-than-expected economic data, while low-priced ACE Market stocks continued to dominate trading. The benchmark index lost 3.39 points to close near session lows at 1,648.22, off an earlier high of 1,654.66, as losers led gainers 434 to 322 on higher volume totalling 1.28 billion shares worth RM1.19 billion.

The trading range for the local benchmark index shrank to 7.49 points last week, compared to 9.85 points the previous week, as blue chips were stuck in narrow trading ranges.

Among the lower liner indices, the FBM-EMAS Index slipped 16.05 points, or 0.14 per cent, to 11,266.26, while the FBM-Small Cap Index lost 73.29 points, or 0.6 per cent, to 12,308.61.

The daily slow stochastic indicator for the FBM KLCI has retraced lower after flashing a sell signal last week, but stayed in the overbought zone due to a reading above 80, while the weekly indicator levelled off at the overbought region. The 14-day Relative Strength Index (RSI) has weakened for a reading at 60.96 as of last Friday, while the 14-week RSI hooked down slightly for a lower reading at 65.26.

Meantime, the daily Moving Average Convergence Divergence (MACD) signal line has flashed a sell following last Friday's index dip, but the weekly MACD retained its medium-term positive signal . The 14-day Directional Movement Index (DMI) trend indicator stayed positive but the ADX line levelled off to confirm a non-trending mode.

Conclusion

Weakening technical momentum highlighted by hook-downs on momentum indicators and a fresh MACD sell signal imply increased downside risk for the FBM KLCI this week. Moreover, the presence of a bearish divergence, formed by lower peaks on the 14-day RSI momentum indicator against higher peaks on the index, suggests a high likelihood of an overdue profit-taking correction ahead of the month-end.

The index's close last Friday below immediate support of 1,649, the rising 10-day moving average, would accelerate correction towards better supports at 1,639 and 1,624, the respective 30-day and 50-day moving averages. A better support platform is available at 1,620, the July 27 pivot low. Immediate resistance remains at 1,660 and 1,672, the respective 1.618 and 1.764 Fibonacci Projection (FP) of the sell-down from the April 3 peak of 1,609 to the May 18 trough of 1,526, with stronger hurdle seen at 1,691, the one-to-one upside projection target.

Chart-wise, expect further weakness in blue chips such as AirAsia, AMBank, CIMB, Maybank, Sime Darby and Tenaga Nasional to stronger support levels before better buying opportunities emerge for medium-term upside, while oil & gas related stocks such as Dialog Group and Perisai Petroleum would also be good buying candidates on dips for longer-term gains.

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