Further consolidation for Bursa on the cards

LIQUIDATING POSITIONS: Shorter trading days and impending school holidays expected to affect Bursa

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BLUE chips on Bursa Malaysia fell into consolidation last week as
investors took profits generated from the strong post 13th General
Election breakout rally, which lifted the FTSE Bursa Malaysia Composite
Index (FBM
KLCI) to record highs. Nonetheless, on the broader
market, strong trading momentum sustained on lower liners and
speculative small caps and penny stocks to highlight retail trading
participation.

The FBM KLCI shed 3.22 points, or 0.18 per cent,
to 1,769.16, with losses on IOI Corp (-32 sen) and Genting Bhd (-18 sen)
offset by gains in Petronas Gas (+RM1.64) and Petronas Dagangan (+92
sen). Average daily traded volume and value increased to 2.54 billion
shares and RM2.58 billion compared with the 2.31 billion shares and
RM3.46 billion, respectively, the previous week, as trading value
contracted due to the increased trading participation of retailers in
speculative lower liners and small cap penny stocks while trading in
blue chips slowed.

Malaysia’s weaker-than-expected first quarter
2013 (1Q13) gross domestic product (GDP) growth took the shine off the
FBM KLCI last week as investors’ negative reaction witnessed profit
taking pressure on blue chips that led to a consolidation in the
benchmark index. The consolidation is appropriate to neutralise its
relatively demanding valuation vis-à-vis regional markets while giving
time to investors time to digest the on-going 1Q13 earnings reporting
season. Anticipate last week’s consolidation phase to extend into this
week amid of shorter trading days and impending school holidays.

While
soft external demand was the prime reason for the unexpected weakness
in the economy during the first quarter, consensus opinions are pointing
towards a stronger recovery in global demand in the second half of 2013
as advanced economies, especially Europe after pathetic performance in
the last four years, rise from doldrums. In the meantime, domestic
demand, led by private consumption and investment, is expected to be the
saving grace to still achieve a commendable five per cent GDP growth in
2013. Of course, in achieving that we need a fair blend of fiscal and
monetary stimulus to prevent the economic momentum from slowing.






On Bank Negara Malaysia’s part, it may not rock the boat by raising
the Overnight Policy Rate in the fourth quarter as widely perceived
previously and could hold it steady for rest of the year amid still low
inflationary pressure. The Consumer Price Index for April that will be
released on Wednesday may not deviate much from the previous month’s 1.6
per cent. The government, on the other hand, post-election can
concentrate again on the Economic Transformation Programme to sustain
economic momentum.

Thus, despite the strong year-to-date
advancement in share prices of property and construction stocks, the
fundamentals and low interest rate environment are still supportive of
earnings growth and expansion in valuation multiples of stocks in these
sectors. There are still value plays like Perisai Petroleum and Pantech
Holdings in the oil and gas sector that are trading at
price-to-earnings multiple of low teens compared with the bigger
players that are trading between 20x and 25x.
Naturally, banks will benefit from the domestic expansion and fund- raising activities.

Any
correction in the index can be viewed as a good opportunity to
accumulate these stocks as the current upcycle appears intact amid
buying support from cash-rich local funds and the absence of any
significant profit-taking from foreign funds that have driven up the
mart so far this year.

Technical Outlook

Spot
month May KLCI futures contract traded on the Bursa Malaysia Derivatives
Bhd eased three points, or 0.17 per cent, week-on-week to 1,766,
maintaining a 3.16-point discount against a 3.4-point discount to the
cash index the previous Friday.

Bursa Malaysia shares climbed
higher on Monday backed by strong buying momentum on the broader market
to lift the benchmark index up to a record closing high. At the close,
the KLCI was up 15.52 points to 1,787.9, off an early low of 1,775.34,
as gainers swarmed losers 889 to 141 on very active trade totalling 2.86
billion shares worth RM3.04 billion. Blue chips fell into shallow
profit-taking consolidation the next day, as buying support cushioned
downside while rotational interest on lower liners and small-caps stayed
robust. The KLCI ended flat at 1,788.43 (+0.53), off an early high of
1,793.15 and low of 1,784.34, as losers edged gainers 504 to 398 on
steady trade totalling 2.24 billion shares worth RM2.68 billion.

Extended
profit-taking on blue chips dragged down the KLCI to close near session
lows on Wednesday, but lower liners and penny stocks were highlighted
by strong retail participation. The index ended 5.4 points lower at
1,783.03, off an early high of 1,793.87 and low of 1,781.02, as gainers
led losers 606 to 287 on strong total volume of 2.95 billion shares
worth RM2.7 billion. Profit-taking followed through to drag blue chips
lower the following day, dampened further by the weaker-than-expected
Q1 GDP data which pressured the KLCI to close near session lows for a
second day. The index ended 16.31 points down at 1,766.72, off an early
high of 1,781.39, as losers trashed gainers 591 to 309 on robust trade
totalling 2.5 billion shares worth RM2.4 billion.

Retail trading
interest on small caps and speculative penny stocks continued to
dominate the market on Friday, while profit-taking consolidation on blue
chips persisted ahead of the weekend. At the close, the index gained
2.44 points to 1,769.19, off an early high of 1,773.53 and low of
1,765.84, as gainers led losers 588 to 271 on slower trade totalling 2.1
billion shares worth RM2.07 billion.

Trading range for the local
blue-chip benchmark index shrank to 28.42 points last week compared to
the huge 83.08 points range the previous week, after blue chips fell
into profit-taking consolidation mode. For the week, the FBM-EMAS Index
added 59.47 points, or 0.5 per cent, to 12,272.18, while the FBM-Small
Cap Index climbed another 687.56 points, or 5.1 per cent, to 14,107.11,
as the lower liners and small-cap space continued to attract strong
momentum trading plays.

Another sell signal was triggered on the
daily slow stochastic indicator for the FBM KLCI, while the weekly
indicator’s signal line hooked down below the overbought zone,
suggesting further profit-taking correction downside. Both the 14-day
and 14-week Relative Strength Index (RSI) momentum indicators have
hooked down with readings of 64.02 and 70.97, respectively, signalling
more weakness is likely to follow.

The bearish signals on
momentum indicators are reinforced by the hook-down on the daily Moving
Average Convergence Divergence (MACD) signal line, but the weekly MACD
continued to expand higher to maintain its uptrend signal. The 14-day
Directional Movement Index (DMI) trend indicator also supported the
bullish trend signal on the weekly MACD, with the +DI and –DI lines
expanding positively on a rising ADX line suggesting strengthening
uptrend.

Conclusion

Except for the weekly MACD
and DMI trend indicators, all other technical indicators for the FBM
KLCI point towards further correction this week. Note also that market
players should begin to liquidate trading positions in this four-day
trading week ahead of the Wesak Day and subsequent two-week school
holidays by month-end, as historically trading activities tend to slow
with the start of every school holiday term. Hence, this week can be
viewed as good opportunity to take profits on any rallies and then
re-enter on profit-taking dips going forward.

On the FBM KLCI,
the pivot lows of 1,752 of May 10 or 1,743 of May 6 would act as
important immediate support levels to cushion profit-taking troughs,
while the 1,718 to 1,743 gap-up supports will be a critical range to
determine the underlying strength of the index. As for the upside,
expect key resistance from 1,791, which represents the 138.2 per cent
Fibonacci Projection (FP) of the 1,526 low of May 2012 to the 1,718 high
of April 2013, with 1,814, the subsequent 150 per cent FP, and the
record high of 1,826 providing stronger resistance.

As for stock
picks, chartwise, I suggest investors switch exposure from blue chips to
bargain lower liners in the construction and oil & gas sectors
like Alam Maritim, AZRB, Benalec, Binapuri, Hiap Teck, Eversendai, TH
Heavy and WCT for further upside in the medium-term.

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