1,600, then profit-taking

Lower liners Supermax, MRCB, UEM Land, Kencana Petroleum and SapuraCrest Petroleum should extend their uptrends on Bursa Malaysia, says a head of research.


While the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) extended gains to settle at a record high for a second week, shored up by buying support for selected index heavyweight blue chips despite grossly overbought technical conditions, the broader market saw profit-taking on lower liners which persisted due to weak buying momentum.

The FBM KLCI advanced 11.8 points, or 0.75 per cent, last week to close at 1,594.74, with gains in Genting Malaysia (+24 sen), Petronas Gas (+74 sen), DiGi.com (+78 sen) and Genting Bhd (+16 sen) representing more than half of the index's rise. Average daily traded volume and value improved mildly to 931.3 million shares and RM1.73 billion respectively, compared with the 903.5 million shares and RM1.65 billion in the previous week.

Bank Negara Malaysia maintained its Overnight Policy Rate at 3 per cent, but raised the statutory reserve requirement by 100 basis points to 4 per cent last Thursday. The move was within this column's expectation against the backdrop of slower-than-expected exports growth for May, which expanded by only 5.4 year-on-year, much lower than consensus expectation of 11 per cent. The latest increase in the SRR was deemed necessary to control liquidity build-up and curb excessive lending in the system with M3 and loan growth still registering double digits in May despite the SRR being raised by 200 basis points in the first half.

As it is, the household debt-to-gross domestic product ratio has risen to 76 per cent from 66 per cent six years ago and the move was deemed necessary to avoid an increase in non-performing loans when interest rates are increased eventually.

With private consumption and investment expected to gain momentum as domestic demand rises in the second half to pick up the slack from external demand, gradual normalisation in the OPR to 3.5 per cent by year-end is highly possible to curb pricing pressure from the demand side. Banks will be the prime beneficiaries as the interest spread over loans and deposits rates widen, apart from the potential increase in capital market activities as demand for money to fund the Economic Transformation Programme (ETP) projects gains momentum in 2H11.

Touching on the ETP, the Government's revelation last Friday on the details of the final alignment, locations of each station and schematics on elevated and underground tracks of the Mass Rail Transit provides assurance that this mega project will start without further delays latest by end-2011 or early-2012. Although the announcement was without details on the remaining two lines, the initial estimated RM20 billion investment in the blue line will ensure steady flow of projects ahead for local construction players.

We should be witnessing the award of some minor and major contracts for this project by August and November respectively, and there should not be any further delays in starting work as issues related to land acquisition could be muted due to fact that 70 per cent of the alignment would run across road reserve land. So, construction players should see some buying interest in the second half of this year as awards on other infrastructure works like the highways and rural roads are also expected to gain momentum during the same period.

The FBM KLCI could break pass the critical 1,600 mark this week before succumbing to profit-taking corrections due to its grossly overbought nature.

For a start, pressure for a correction may arise from the US market's performance last Friday after its payroll for June expanded by only 18,000 workers, a sharp contrast to consensus expectation of 105,000,and a higher jobless rate of 9.2 per cent. There are no major economic indicators due for this week locally apart from the Industrial Production Index and manufacturing sales for May that should reflect the same outcome as last week's exports figure. Externally, investors could be waiting to scrutinise the minutes of the US' Federal Open Market Committee meeting that will be released on Wednesday. The immediate term strategy is to Sell-on-Strength for a re-entry around the previous double-top level of 1,576.

Technical outlook

In index futures, the spot month July contract traded on Bursa Malaysia Derivatives rose 8 points, or 0.5 per cent week-on-week to 1,592, reversing to a 2.74-point discount to the cash index, compared with the 1.06-point premium the previous Friday, as traders ignored the artificial last-minute spikes in the cash index.

Shares on Bursa Malaysia rose on Monday, lifted by regional gains after the European Union pulled Greece back from the brink of default and US manufacturing recovered, but profit-taking softened prices in afternoon trade. At the close, the FBM KLCI eased 0.59 point to 1,582.35, off an early low of 1,577.81.

Profit-taking kept stocks in narrow rangebound trade the next day amid regional weakness following a downgrade on China's banks by Moody's Investors Service. The FBM KLCI subsequently eased half a point to close at 1,581.85.

Strong gains in blue chips and general improvement in retail sentiment on Wednesday boosted the key index heavyweight to close at a record high. The FBM KLCI ended at a new high of 1,591.34, off an opening low of 1,580.46, led by gains in Genting Bhd, Petronas Chemical and Petronas Dagangan.

While blue chips consolidated their recent gains on profit-taking the following day, the local market was propped up by resilient Asian markets after China raised interest rates, with investors cautiously nibbling on lower liners. The FBM KLCI eased 1.1 points to close at 1,590.24, off an early high of 1,595.87 in more active trade totalling 1.27 billion shares worth RM2.06 billion.

Despite strength in regional markets on Friday helped by stronger-than-expected US retail sales and jobs data, the local market fell into profit-taking mode with investors hesitant to commit themselves. Nonetheless, late gains in Petronas Gas, MISC and Genting Bhd pushed the index up 4.5 points to a record closing high of 1,594.74, off a low of 1,584.94, as losers beat gainers 390 to 287 on slow trade totalling 810.5 million shares worth RM1.57 billion.

The trading range for the FBM KLCI was 18.06 points last week, smaller than the 22.62-point range the previous week, as post first-half window-dressing profit-taking in blue chips restricted gains.

Among other indices, The FBM-Emas Index climbed 68.22 points, or 0.63 per cent on the week to close at 10,934.33 on Friday, while the FBM-Small Cap Index added 61.33 points, or 0.48 per cent to 12,777.65.

The daily slow stochastics indicator for the FBM KLCI has re-hooked upwards in overbought territory, while the weekly indicator climbed deeper into extreme overbought zone with readings remaining in the high nineties, suggesting a profit-taking correction is imminent. In addition, the 14-day Relative Strength Index (RSI) indicator has climbed above the overbought mark with a reading above 70, but the 14-week RSI retained its upward thrust.

However, the daily Moving Average Convergence Divergence (MACD) signal line improved on its bullish expansion against the MACD line, further strengthened by the weekly MACD indicator which flashed a buy signal two weeks ago. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator expanded further from each other with the ADX line climbing close to 40, indicating a stronger uptrend.

Conclusion

Given the more extreme overbought technical readings on key daily and weekly momentum indicators for the FBM KLCI, with the 14-day RSI already overbought at a four-month high, and weak follow-through buying momentum on the broader market last week, a profit-taking correction is most likely this week.

Nonetheless, trend indicators improved their bullish readings, suggesting the longer-term uptrend remain intact. Thus, would recommend investors sell on rally or take profits on blue chips such as CIMB, Genting Malaysia and TM which have overbought RSI readings of above 70 prior to a near-term profit-taking correction, before buying in again.

As for lower liners, stocks like Supermax, MRCB, UEM Land, Kencana Petroleum and SapuraCrest Petroleum should extend their uptrends going forward.

Immediate resistance for the FBM KLCI rests at 1,601, the 123.6 per cent Fibonacci Projection (FP) of the 1,576.95 record high of January 6 to the 1,474 pivot low of February 28, which is the mirror image of the 76.4 per cent Fibonacci Retracement (FR) level, with next resistance at 1,616, the 138.2 per cent FP. The next stronger resistance will be 1,628, the 150 per cent FP. In a profit-taking correction, look for crucial support from the breakout point of 1,576, where strong buying support should materialise following a breakout.