Mind the (post-GE13) gap

Business & Markets 2013
Written by Lee Cheng Hooi
Friday, 10 May 2013 10:32
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THE EUROPEAN Union (EU) is weighing whether depositors of deposit
insurance funds should be paid back ahead of other unsecured creditors
in new rules on bank resolution. If clear preference is not given to any
depositors, national funds would stand in line with uninsured depositors,
senior bondholders and other unsecured creditors to divide up a failed
bank’s assets and share in absorbing losses, according to a confidential
EU impact study.
US stocks, meanwhile, rose with the Dow Jones Industrial Average
climbing above 15,000 for the first time on Wednesday as earnings
forecasts from Whole Foods Market Inc and Electronic Arts Inc beat
analyst estimates as well as increased optimism over global central
bank stimulus. US Federal Reserve chairman Ben Bernanke has kept
overnight interest rates near zero since December 2008 and embarked
on a bond buying programme that has expended the central bank’s
balance sheet to more than US$3 trillion (RM8.9 trillion). The Dow rose
by 48.92 points to close at 15,105.12 on Wednesday.
The FBM KLCI traded in a firmer but wild range of 83.08 points for the
week with low volumes of 1.91 billion to 2.45 billion shares done. With
the election (GE13) result and win for the incumbent party, the index
gapped-up on Monday and prices spiked to a new traded all-time high
of 1,826.22.
The index closed at 1,766.07 yesterday, down 7.93 points from the
previous day as blue chip stocks like CIMB Group Holdings Bhd ,
GENTING BHD [], PUBLIC BANK BHD [], PETRONAS DAGANGAN
BHD [] and PETRONAS GAS BHD [] caused the index to end lower on some profit taking. There were some obvious
rotational activities into mid cap and lower liner stocks.
The KLCI’s recent key swings were 1,590.67 (low), 1,699.68 (high), 1,597 (low), 1,664.39 (high), 1,613.94 (low) and
1,826.22 (high). The recent post-GE13 surge to a fresh all-time high of 1,826.22 happened on Monday. From the closing of
1,694.77 on May 3, there now exist two obvious gap-up areas of 1,712.03 and 1,718.44 on the chart. Despite the higher
volumes that were churned from Tuesday to yesterday, there is maybe a period of consolidation and correction to the gap-up
support areas mentioned above in the next few weeks. As such, the key support levels are seen at 1,712, 1,718 and 1,743,
while the resistances of 1,766 and 1,783 as well as the all-time high of 1,826 will offer heavy selling.
The current rebound rally from the 801.27 low (October 2008) to the 1,826.22 all-time high represents an extended Elliott
Wave “Flat” rebound in a “Pseudo-Bull” rise. Tactically, investors may liquidate on rallies due to the index’s ample long-term
bearish divergence signals as well as the gap-up moves mentioned.
Continue to take profit on any price rallies, as the divergent longer-term technical signals are very obvious and overextended
for 55 months now. Overlapping support and resistance levels at 1,664.39 and 1,635.55 also indicate the “bluff” nature of this
current index rise.
Its daily indicators (like the CCI, DMI, MACD, Oscillator and Stochastic) remain upbeat and its moving averages depict a
triple time frame uptrend (daily, weekly and monthly). Despite these positive signs, we believe investors should take a
short-term investment philosophy as the index remains shaky at lofty and overbought levels for now.
Due to the good tone of the KLCI, we are recommending a “buy” on KOSSAN RUBBER INDUSTRIES BHD []. Kossan is
planning a more aggressive capacity expansion after its proposed acquisition of a 56-acre (22.66ha) parcel of land in
February this year. The group is targeting to achieve a total capacity of 26 billion pieces per year by 2017 (+86% from now),
focusing on production of higher-margin nitrile gloves. Its technical rubber products (TRP) venture into Indonesia is still
ongoing with plant CONSTRUCTION [] to commence in July 2013 and completion slated for the first quarter of 2014. The
company has also initiated TECHNOLOGY [] advancements for its new plants bringing productivity close to HARTALEGA
HOLDINGS BHD []’s.
Furthermore, latex prices in Malaysia finally succumbed to weaker global demand and turned decidedly downwards in March.
As at April 25, Malaysian latex prices are 10% below their peak in January this year, but still lag behind Malaysian dry rubber
(23%) and Thai rubber (17%). Elsewhere, nitrile butadiene rubber (NBR) prices are also on a downward trend; having fallen
7% from their peak in February this year, they are now down 25% year-on-year.
Maybank-IB currently has a “buy” call on Kossan with a target price of RM4.40 on an unchanged target 2014 financialy year
price-earnings ratio (PER) of 10 times. A check on Bloomberg consensus reveals there are 15 other research houses that
have fundamental coverage on Kossan with 14 “buy” and one “hold” call. Kossan is currently trading at a PER of 12.4 times
with a dividend yield of 2.22%.
The share price made an obvious surge since its daily Wave 2 low of RM2.97 on Sept 11, 2012. Since that significant low,
Kossan surged on a very firm daily Wave-3 move to its recent high of RM4.10, accompanied by heavier volumes traded since
March this year. Its chart has moved into daily, weekly and monthly uptrends to its recent high of RM4.10. As it broke above
its recent key critical resistances of RM3.78 and RM3.88, look to buy Kossan on any dips to its support areas as the moving
averages depict very firm short- to medium-term uptrends for this stock.
The weekly and monthly indicators (like the CCI, DMI, MACD, Oscillator and Stochastic) are firmly positive and now depict
the obvious indications of Kossan’s eventual move to much higher levels. We expect it to remain very firm towards its support
levels of RM3.78, RM3.88 and RM4.01. It will attract minor profit taking at the resistance levels of RM4.10, RM4.16 and
RM4.28. Its upside targets are now located at RM4.40, RM4.52 and RM4.96.
Lee Cheng Hooi is head of retail research at Maybank Investment Bank. The views expressed in the article are the opinions
of the writer and should not be construed as investment advice. Please exercise your own judgment or seek professional
advice for your investment decisions. Technical report appears every Wednesday and Friday.