FBM KLCI expected to rebound

Property stocks such as E&O and Malton should see keener buying interest given their cheaper prices, while Perisai Petroleum and Scomi Group could stage recoveries this week, says a research head


The local stock exchange suffered a sharp correction last week, after initial optimism over the deal in Washington to raise the US debt ceiling and slash the federal deficit was overshadowed by a surprise dip in American consumer spending in June.

Speculation of a third quantitative easing (QE3) in the US was offset by heightened concerns that the US economy could fall back into a recession and that debt problems in Europe will spread, triggering a sharp sell-off on Thursday which spilled over to drag global markets sharply lower last Friday.

Subsequently, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) tumbled 24.38 points, or 1.57 per cent, for the week to 1,524.43, with Public Bank (-30 sen), Genting Bhd (-36 sen), Petronas Chemical (-26 sen), MISC (-45 sen) and IOI Corp (-16 sen) representing over half of the index's losses.

Average daily traded volume and value expanded to 1.2 billion shares and RM1.97 billion respectively, compared with 1.02 billion shares and RM1.61 billion in the previous week.

Worries about a severe slowdown in the US economy hit sentiment last Thursday as investors still resented the slightest indication of the world's largest economy slipping into a double-dip recession.

Worse, it came on the heels of the eleventh-hour deal that lifted the US debt ceiling last Monday to nullify the equity market's resuscitation that was in motion.

Last Thursday's tumble could just be a blip and overdone. While the Dow's 61-point rebound the following day on better-than-expected non-farm payroll numbers is reassuring, a flow of positive economic data will be needed to convince investors that the US would not succumb to another recession.

The probability of a double-dip in the US appears remote and the Federal Reserve is likely to maintain its monetary stance when the policymakers meet tomorrow.

This column would not be surprised if another round of quantitative easing is introduced to check the faltering growth rate in the wake of the downgrade of the US' credit rating by Standard & Poor's.

The rating agency's downgrade of the US' triple-A status to AA-plus after market close last Friday could take away a bit of the shine from the US bond market into equities.

While the switch may not be pronounced as the two biggest holders of US Treasuries, China and Japan, could maintain their exposure to limit their own currencies from strengthening further, private investors could opt for US equities on the back of still robust earnings growth outlook for S&P 500 stocks. The implication is positive for emerging market equities.

As such, this column remains optimistic about the FBM KLCI's prospects for the rest of 2011 on the back of strong commitment from the government to drive domestic expansionary measures.

Investors should accumulate on weakness government-linked counters to ride on the recovery path that should be under way this week after the US recovery last Friday.

An anticipated QE3 announcement over the next two weeks or any hints about it from the Fed tomorrow will augur well for the equity market. Between the two evils of inflation and stagflation, the Fed has little option, but to opt for the former.

Locally, news about Khazanah Nasional disposing of its 17 per cent stake in Malaysia Airlines to Tan Sri Tony Fernandes and opting for a similar stake in AirAsia came as a surprise as the buzzword linked to MAS has always been "privatisation".

This could be a better option as the government has been talking about divesting its stakes in and listing government-linked-companies for some time.

Thus, news about privatisation could be an anti-climax.

Earlier, talk about Tenaga Nasional Bhd being taken private had circulated in the market for some time and it was denied by our prime minister recently.

However, who is willing to buy a controlling stake in TNB without first sorting out the issues over tariff increases and capacity payments to independent power producers? Breaking up its operations and listing them separately could be an option while taking the contentious power generation business private.

Speculation aside, the aviation deal is a win-win situation for both parties. Working together could lead to better operational efficiency, rationalisation of routes and provide better bargaining power with parts suppliers, airport operators and aircraft manufacturers. Anticipate a re-rating in MAS' and AirAsia's share prices following the news.

Technical outlook

In the index futures market, new spot month August traded on Bursa Malaysia Derivatives fell 15.5 points last week to settle at 1,522.5, recovering to a 1.93-point discount to the cash index, compared with the 10.8-point discount the previous Friday, as buyers came in to bargain hunt after the sharp correction in blue chips.

Shares on Bursa Malaysia rebounded on Monday, boosted by firm regional markets on speculation US lawmakers had reached agreement over the weekend to raise the debt ceiling and slash the federal deficit. The key index climbed 9.2 points to settle near session highs at 1,558.01.

Stocks corrected the next day in line with regional weakness after US manufacturing registered the slowest growth in two years, and amid speculation China will raise interest rates to tame inflation. It eased 3.16 points to end at 1,554.85.

The local market extended losses on Wednesday, dragged down by heavy regional falls following a surprise decline in US consumer spending in June which increases the risk for a slowing economy. The local benchmark index lost 9.75 points to close at 1,545.1, off an early low of 1,538.95, as losers beat gainers by 514 to 259 on higher volume of 1.16 billion shares worth RM1.75 billion.

Stocks gave back early gains the following day helped by speculation of a QE3 in the US, as concerns over slowing US recovery and lower crude oil prices dampened the market tone. The FBM KLCI ended up 1.79 points at 1,546.89, off an early high of 1,552.91.

The market tumbled ahead of the weekend, copying heavy regional losses following the sharp sell-off on Wall Street overnight amid heightened concerns the US economy could fall back into recession. At the close, the local benchmark index slumped 22.46 points to 1,524.43, off a day low of 1,509.37, on negative market breadth as losers thrashed gainers by 934 to 60 on turnover totalling 1.78 billion shares worth RM3.67 billion.

The trading range for the index ballooned to 49.47 points last week, compared with the 20.58-point range the previous week, triggered by big losses in core heavyweights.

Among other indices, the FBM-EMAS Index lost 204.49 points to 10,478.3, while the FBM-Small Cap Index shed 340.14 points to 12,171.13.

The daily slow stochastics indicator for the FBM KLCI flashed another sell signal at the lower neutral area, while the weekly indicator's bearish signal line has also retraced to the lower neutral zone.

The 14-day Relative Strength Index (RSI) indicator eased to a low momentum reading of 28.6 as of last Friday, while the 14-week RSI sank lower to read 46.23.

Meantime, the daily Moving Average Convergence Divergence (MACD) indicator stayed bearish as the signal line sank lower below the zero line, while the weekly MACD signal line expanded negatively to suggest weaker trend ahead. The bearish trend is reinforced by the 14-day Directional Movement Index (DMI) trend indicator, with its +DI and -DI lines expanding negatively on a strengthening ADX line, implying an extended correction.

Conclusion

While momentum and trend indicators for the key index have turned increasingly bearish due to last week's sharp correction, a bounce back from a fresh three-month low of 1,509 last Friday indicate good potential for a technical rebound this week.

Moreover, last Friday's rebound on Wall Street following a lower-than-expected unemployment rate of 9.1 per cent and higher employment numbers should encourage a recovery early this week.

Of the blue chips, Genting Malaysia, RHB Capital, Sime Darby and TM are likely to prove resilient given the strong institutional buying on weakness interest last week. Chart-wise, property stocks such as E&O and Malton should see keener buying interest given the cheaper prices, while Perisai Petroleum and Scomi Group could stage recoveries this week.

As for the index, a daily "hammer" candlestick sighted last Friday, which is a potential bullish reversal Japanese candlestick pattern, augurs well for the bulls, despite it breaking and closing below the critical 200-day moving average support level of 1,531. A rebound to stay above this level would be positive and encourage bargain hunters to return.

Immediate levels to watch out for profit-taking resistance are at 1,535 and 1,550, representing the 50 per cent and 38.2 per cent Fibonacci Retracement (FR) of the recovery from 1,474.38 low of February 28 to the 1,597.08 record high of July 11. Immediate supports are at 1,521 and 1,503, the respective 61.8 per cent FR and 76.4 per cent FR levels, with the 1,500 to 1,498 psychological support area acting as stronger downside buffer.