KL brace for renewed downside pressure

As expected, Bursa Malaysia saw a technical rebound from severely oversold conditions in last week's one-and-a-half day trading session, as the market played catch-up to the rebound in global markets during the three-day Merdeka Raya holiday.


However, stocks ended off-best for the week following a regional correction on concern the August unemployment data in the US will indicate the world's largest economy continues to struggle.

As a consequence, the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) recouped 29.28 points, or 2.03 per cent last week to settle last Friday at 1,474.09, with CIMB (+36 sen), IOI Corp (+18 sen), Petronas Chemical (+27 sen), DIGI.com (+124 sen) and MISC (+37 sen) contributing to slightly more than half of the index's gain.

Average daily traded volume and value dropped to 649.8 million shares and RM1.51 billion from 884.5 million shares and RM1.92 billion in the previous week, not surprising given that most investors were away on holiday.

Last Friday's strong rebound is not expected to last when market reopens today as any positive undertone could have been tempered by the US market's poor performance last Friday after payrolls data kept alive fears of a double-dip recession.

The US payrolls and unemployment rate were unchanged last month as modest hiring by private employers was offset by continued government layoffs. The outcome was totally unexpected as consensus expectation was for a net addition of 68,000 jobs. Besides that about 58,000 jobs were also removed from June-July's net addition of 163,000.

As this paints a bleak picture for consumption and private investment, anticipation of drastic measures to revive the ailing US economy is building up ahead of the US President Barack Obama's speech to a joint session of Congress on Thursday and the US Federal Reserve's policy meeting on September 20 and 21.

Hopefully, any intention to boost infrastructure spending is not marred by another round of wrangling between the US policy makers as that could affect the extension of transportation bill that will expire on October 1.

As it is, the US job data has already spooked the market. The Markit iTraxx SovX Western Europe Index of credit-default swaps insuring the debt of 15 governments rose to all-time high 310 basis points after the US job data and any delays in extending the transportation bill will only add pressure on job creation.

Sentiment this week could also be dampened by the fact that China's purchasing managers' index slipped two points to 57.6 in August, indicating a moderation in the world's second-largest economy.

If external factors do not improve, the negative implications on our economy and corporate earnings will be unavoidable. As highlighted last week, the recently concluded second quarter results season was not inspiring. Corporate Malaysia's earnings declined for the second consecutive quarter after it contracted 2.3 per cent quarter-on-quarter.

Going forward, there is further downside risk to earnings forecasts if the economic momentum fails to pick up. Post second quarter results season, calendar year 2011 (CY11) earnings growth for the FBM KLCI's component stocks have been lowered to 10 per cent from 15.4 per cent (but the downgrade has resulted in CY12 growth rising to 14 per cent from 12.6 per cent).

The downgrade is mirrored in a lower year-end target of 1,490 for the benchmark index based on a mid-cycle price-to-earnings ratio of 14.5x.

The benchmark index is expected to remain volatile in the next few months as investors react to every piece of negative news but expect the downswing to be capped at 1,340 based on CY12 PER of 12.3x (which is the average PER of 2008, the year when key index dipped to a low of 801 in October from a high of 1,524 in January due to a meltdown in the US).

Those targets did not impute the possibility of a double-dip in the US or contagion effect from the weakening Eurozone economies or any fallout in European banks. Should these factors become reality, anticipate a severe correction in the FBM KLCI over the next 12-month period based on historical accounts, which has been highlighted last week. Thus, investors are advised to remain defensive.

Technical outlook

In the index futures market, new spot month September traded on Bursa Malaysia Derivatives rose 28.5 points, or 2 per cent for the week to close at 1,460.5, slightly increasing its discount to the cash index to 13.6 points, compared with the 12.8-point discount the previous Friday. The futures market's undertone stayed fragile due to the persistently adverse external sentiment.

The local stock market saw a technical rebound on the half-day trading session on Monday, helped by oversold conditions and the rebound on Wall Street the previous Friday after US Federal Reserve chairman Ben Bernanke suggested potential for additional stimulus measures to boost the economy.

Trading was slow ahead of the Merdeka Raya holidays, with gainers leading losers by 432 to 214 on 447 million shares worth RM893.6 million, as the benchmark index gained 2.46 points to close at 1,447.27 after rising from an opening low of 1,446.12 to high of 1,456.18.

Stocks staged a belated recovery on Friday to play catch-up with the rebound on global markets over the three-day holidays, in spite of a correction in the region amid concern the closely watched US monthly unemployment report will indicate a struggling economy.

The FBM KLCI climbed 26.82 points, or 1.85 per cent to close at 1,474.09, off an opening low of 1,460.66 and a high of 1,483.79, as gainers outnumbered losers 505 to 238 in moderate trade totalling 852.4 million shares worth RM2.13 billion.

The trading range for the key index shrank to 37.67 points last week, compared with the 45.19-point range the previous week.

Among other indices, the FBM-EMAS Index rose 202.72 points, or 2.05 per cent to 10,074.44, while the FBM-Small Cap Index regained 166.93 points, or 1.48 per cent to 11,410.50.

An early buy signal from the oversold region was flashed on the daily slow stochastics indicator for the FBM KLCI, but the weekly indicator continued to fall towards the oversold zone.

Both the 14-day and 14-week Relative Strength Index (RSI) indicators recuperated with hook-ups to register mildly positive readings close to 40.

The daily Moving Average Convergence Divergence (MACD) indicator signal line has also recuperated with a mild incline, but the weekly MACD signal line continued its descent below the zero line, signaling further correction ahead.

Meanwhile, the 14-day Directional Movement Index (DMI) trend indicator sustained its downtrend reading, but the +DI and -DI lines contracted due to last week's rebound.

Conclusion

While the rebound last week offers some hope, tumbling US and European markets last Friday sparked by stagnating August employment numbers in the US, which renewed recession fears, would set a negative tone this week.

Thus, expect fresh downside volatility with any near-term strength likely to be matched with keen selling interest, as investors look to reduce stock holdings. So, stay defensive and look to sell on strength.

Chart wise, only buy into sharp dips to stronger retracement supports on blue chips such as AirAsia, CIMB, Gamuda, Genting Bhd, IOI Corp, RHB Capital, Sime Darby and TM.

In the meantime, the local index must hold above the crucial pivot low support at 1,423.47 on August 9, which is reinforced by 1,420, the 50 per cent Fibonacci Retracement (FR) of uptrend from the 1,243 low of May 27 2010 to the 1,597.08 record high of July 11, to prevent a deeper correction to 1,378, the 61.8 per cent FR, with next significant retracement support at 1,327, representing the 76.4 per cent FR.

Immediate upside hurdles stays at 1,490 and 1,510, the respective 38.2 per cent FR and 50 per cent FR levels of the sell-off from the 1,597.08 record high to the recent extreme low of 1,423.47, with the formidable hurdle staying at 1,530, the 61.8 per cent FR matching the 200-day moving average.