Further correction ahead for KL stocks

Bargain hunters should look to accumulate on weakness blue chips such as Axiata, Gamuda, Genting Bhd and Tenaga for technical rebound gains, says a head of research

The local stock market extended its correction for another week after the US Congress delayed voting on a plan to raise the country's debt ceiling, increasing concern over a potential default on its sovereign debt and higher risk of a credit rating downgrade.

As a consequence, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) declined 16.25 points, or 1.04 per cent, to 1,548.81, with most of the correction coming from CIMB (-26 sen), MISC (-45 sen), Petronas Chemical (-19 sen) and Tenaga (-14 sen). Average daily traded volume and value increased to 1.02 billion shares and RM1.61 billion, respectively, compared with 980.1 million shares and RM1.85 billion in the previous week, contributed by stronger retail interest in cheap penny stocks and listing of multiple call warrants on Bumi Armada.

D-day is looming for the US government to resolve the impasse on raising the debt ceiling and coming out with an acceptable solution to fix its budget deficit and growing debts. Chances of the US defaulting on its obligations appear remote. According to the US Treasury, about US$90 billion in debt matures on Thursday, more than US$30 billion in interest comes due on August 15 and more than US$500 billion matures in August.

As the revenue that it will earn during the month will be just enough to service the interest and cover critical expenses, a rollover of debts is the most likely scenario if the debt ceiling is not raised on time. But prioritising obligations is just an immediate term fix. A default or no default, the likelihood of a rating downgrade from big rating agencies appears more certain without a credible solution to pare down debts.

With its first quarter gross domestic product growth adjusted lower to an annual pace of 0.4 per cent from prior estimate of 1.9 per cent and second quarter expansion narrowing to 1.3 per cent from widely expected 1.8 per cent, the US economy is in serious trouble. The US government and policymakers have to walk a very tight rope now. Cutting too much on spending to avert a rating downgrade risk the possibility of a further slowdown while maintaining it without a significant reduction will incur the wrath of rating agencies. A cut in credit rating will increase the cost of debts and weaken further the US dollar against other major currencies.

With fiscal policy losing its tooth, the Federal Reserve Board has little choice but to sustain its current monetary easing for an extended period and find a solution to prevent interest cost from rising and affecting economic growth. A third quantitative easing could be on the cards if not for the inflationary pressure but nothing is impossible if the central bank could impose strict rules in preventing the new money supply from being channelled into areas other than productive ventures.

Moody's threat to downgrade Spain is another short-term dampener for global equity markets. Malaysia will not be spared the impact of these negative external developments but the damage is expected to be less severe due to its defensive qualities and clear long-term vision for domestic expansion through its Economic Transformation Programme (ETP). However, there is a need for the government to have a proper check-and-balance mechanism and manage counteractive news flows that could undermine real serious efforts to boost activities in certain sectors.

For instance, too much news flows from little-known companies about multi-billion-ringgit projects in the oil and gas sector without proper approval from the government, its agencies or regulatory bodies mock serious efforts and do more damage than good.

Whatever the current short-term dampeners, bear in mind in the ringgit is slated to strengthen further against the US dollar. This is a boon not only to attract fund flows into equities and other asset classes but also lower our import cost at a time more private investment is needed to realise our Vision 2020 through domestic expansion. Malaysia's fundamentals are intact and it was rated by The Economist as the second lowest in terms of economic overheating among many important economies. A stronger ringgit will provide more ammunition for the central bank to contain inflationary pressure and prevent aggressive monetary tightening. So, buy-on-weakness GLCs and stocks that are related to the ETP theme in the banking, oil & gas, construction and property sectors. The expected normalisation of Overnight Policy Rate is not expected to badly affect property demand as banks are still offering attractive rates at base lending rate minus 2 per cent to 2.5 per cent and selective developers are giving discounts of up to 10 per cent.

Technical outlook

On the index futures market, spot month July traded on Bursa Malaysia Derivatives sank 30 points, or 1.9 per cent, last week to expire at 1,538, slumping to a 10.8-point discount to the cash index, compared with the 2.94-point premium the previous Friday, as bears dominated given the adverse external sentiment which spilled over to dampen the local market tone.

Shares on Bursa Malaysia extended their correction on Monday in line with the region, amid concern failure of the US Congress to agree on raising the federal debt ceiling would increase the prospect for a default that would harm a global economic recovery. The FBM KLCI fell 5.46 points to close at 1,559.60, off the opening high of 1,565.46. The local market rebounded the next day on mild bargain-hunting after higher earnings forecast lifted regional markets, offsetting concerns the US debt ceiling deadlock would threaten the global economic recovery. At the close, the FBM KLCI was up 2.17 points at 1,561.77.

Stocks stayed in rangebound trade amid mixed regional markets on Wednesday, dampened by the political deadlock over the US debt ceiling increase as the deadline nears. The FBM KLCI was down 3.6 points to close at 1,558.17, off a high of 1,565. However, stocks extended losses the following day, with CIMB and Petronas Chemical leading the index lower, as uncertainty over the US debt limit situation and weaker US economic data dampened market tone. The FBM KLCI lost 6.26 points to settle at 1,551.91, off the low of 1,544.96, as losers thrashed gainers 480 to 290 on turnover of 1.06 billion shares worth RM1.74 billion.

The market fell further ahead of the weekend, copying weaker regional markets after the US Congress delayed voting on a plan to raise the country's debt ceiling, increasing concern over a potential default on its sovereign debt. The index lost another 3.1 points to end the week at 1,548.81, off an early low of 1,544.88, as losers edged gainers 426 to 306 on higher turnover of 1.11 billion shares worth RM1.71 billion

The trading range for the FBM KLCI was 20.58 points last week, compared against the 23.52-point range the previous week.

Among other indices, the FBM-Emas Index fell 83.64 points, or 0.8 per cent, to 10,682.79, while the FBM-Small Cap Index declined 77.41 points, or 0.6 per cent, to 12,511.27.

The daily slow stochastics indicator for the FBM KLCI re-hooked down into the mildly oversold area due to last week's correction extension, while the weekly indicator's signal line retraced further into the neutral zone. The 14-day Relative Strength Index (RSI) indicator registered a weaker reading at 36.46 as of last Friday, while the 14-week RSI eased further to read 52.37.

The daily Moving Average Convergence Divergence (MACD) indicator has declined below the zero line, while the weekly MACD signal line triggered a sell, both signalling bearish potential. Meantime, the +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator expanded slightly with the ADX line reading lower, suggesting a protracted consolidation ahead.

Conclusion

Given the more bearish trend signals on the local benchmark index and further correction on external markets, primarily depressed by the delayed vote by the US Congress on the sovereign debt limit increase, investors can expect extended correction this week. Moreover, traditionally, the first week of Ramadan would see buying momentum suffer as market players retreat to the sidelines. However, further losses would aggravate oversold market conditions. Hence, a technical rebound is likely on a sharp dip that cushions downside. As such, bargain hunters should look to accumulate on weakness blue chips such as Axiata, Gamuda, Genting Bhd and Tenaga for technical rebound gains. As for lower liners, MRCB, Mulpha International, Dialog Group and KNM Group are looking more attractive to accumulate for medium-term recovery.

Since the 1,552 immediate support has been broken last week, look for better FBM KLCI support at 1,537, the 61.8 per cent Fibonacci Retracement (FR) of the 1,576.95 high of January 6 to the 1,474 pivot low of February 28, with stronger support seen at 1,525, the 50 per cent FR. Immediate resistance is retained at 1,565, last Monday's high, with next hurdle at 1,576, followed by the July 11 record high of 1,597

Read more: Further correction ahead for KL stocks [You must be registered and logged in to see this link.]

thanks hlk for the update, this week must be cautious, +1 rep [You must be registered and logged in to see this image.]

gaga wrote:thanks hlk for the update, this week must be cautious, +1 rep [You must be registered and logged in to see this image.]

tq sun, i hope tis wk will c u making tons of $$ nw tat sifu n sifu zai r back ...

hlk wrote:

gaga wrote:thanks hlk for the update, this week must be cautious, +1 rep [You must be registered and logged in to see this image.]

tq sun, i hope tis wk will c u making tons of $$ nw tat sifu n sifu zai r back ... [You must be registered and logged in to see this image.]

welcome hlk, yes, team spirit, lets HUAT [You must be registered and logged in to see this image.]