Blue chips expected to see further correction
This is viewed as a good opportunity for investors to bargain hunt, especially those who are staying on the sidelines at the moment, for attractive medium-term upside going forward.
Consequently, the FBM KLCI retraced 11.93 points, or 0.8 per cent last week to settle at 1,499.81, with Genting Bhd (-52 sen), Tenaga (-31 sen), Gamuda (-34 sen) and DIGI (-96 sen) accounting for most of the benchmark index's loss. Average daily traded volume ballooned to 1.64 billion shares with average value at RM2.27 billion compared with 1.27 billion shares and RM1.54 billion average in the previous week, boosted by strong buying interest in small-cap and lower-liner penny stocks as blue chips consolidated on profit-taking.
As opposed to the US and the European countries that are helpless in stimulating domestic economic growth via unorthodox measures after the start of the 2007 financial crisis, China has been successful in reviving economic activities through its multi-billion-yuan stimulus packages aimed at domestic spending. It has evolved into healthy problems in the form of strong economic growth and rising inflation. Since then, it has been trying to suppress the growth momentum by curbing credit expansion and real estate investment but without very much success. The rise in the October inflation rate to 4.4 per cent, although largely attributed to food prices, is a worrying development that could spread to other economic sectors.
As greater liquidity from the second round of quantitative easing in the US has increased the inflationary pressures on both soft and hard commodities, the rising risk of higher food prices will not be limited to China alone but will also affect the rest of the economies in this region. China's move to avoid an economic bubble that could burst later by imposing various measures to cool inflation and expansion may gain traction in the coming months, which could affect countries that are dependent on Chinese imports in the long run, especially the US.
In the immediate term, such a scenario raises the prospect of further strengthening in the yuan that will have similar effect on other regional currencies, including the ringgit. So, this short-term hiccup could attract greater foreign interest into the local equity market that netted RM1.8 billion in trading participation in October when the rest, including local institutions and retailers, were net sellers.
As for Ireland, it insists that it does not need any aid and does not want to relent to Germany's pressure to seek aid before a meeting of European finance ministers tomorrow. Worries about Ireland may continue until investors turn confident with measures introduced in the country's 2011 budget that will be unveiled on December 7.
Back on Bursa Malaysia, expect further mild corrections in the FBM KLCI this week towards the 1,478 technical support level but expect rotational buying interest in the second and lower liners to be sustained. This includes the oil and gas players that will benefit from tax incentives given to oil majors to explore marginal oil fields.
As domestic factors like a strong ringgit, launch of various projects under the Economic Transformation Plan, mergers and acquisitions, new listings of government-linked companies and a possible general election next year are likely to sustain expectations of a possible expansion in valuation multiple in the FBM KLCI, investors should regard a correction to this level as a buying opportunity to ride on a market rally next year.
Technical outlook
Spot month November FBM KLCI futures contract traded on Bursa Malaysia Derivatives closed at 1,491, losing a huge 24.5 points week-on-week and reversed to an 8.8-point discount to the cash index against the 3.76-point discount the previous Friday, as the sharp correction on external markets depressed the futures market.
Shares on Bursa Malaysia staged a catch-up rally on Monday after missing last Friday's global rally due to the Deepavali holiday, led by property and plantation stocks on optimism over the UEM Land-Sunrise merger and surging CPO prices respectively. The FBM KLCI rose 8.1 points to settle at 1,519.84.
Despite the mixed regional tone, the local market stayed vibrant Tuesday as situational plays on construction, water-related and stockbroking counters highlighted trading. The benchmark index managed to climb 6.69 points to close at a record high of 1,526.53.
Stocks extended gains on Wednesday, as active rotational interest in construction and oil & gas sectors offset the weaker regional tone. The FBM KLCI added 1.48 points to close at 1,528.01, off an early high of 1,531.99, lifted by gains in YTL Corp and HL Bank, on strong market volume totalling 1.74 billion shares worth RM2.27 billion, which was the highest daily volume in 10 months. The local market fell in a profit-taking correction on Thursday, with blue chips Maybank, PPB Group and Tenaga leading losses, but oil & gas stocks bucked the trend given the firm crude oil prices. The index lost 14.31 points or 1 per cent to close at the day's low of 1,513.7.
The market extended losses on Friday, as more investors cashed out trading positions amid concerns China may increase interest rates and as a majority of investors feared Ireland may default on its sovereign debt. Consequently, the index declined 13.89 points, or nearly 1 per cent, to settle at 1,499.81, off an intra-week low of 1,488.06, as losers bashed gainers 771 to 155 on strong volume totalling 1.72 billion shares worth RM2.39 billion.
Trading range last week expanded sharply to 43.9 points, compared to the narrow 8.7-point range the previous week, as selected blue chips corrected heavily due to keen profit-taking interest, but lower liners and small-cap stocks stayed resilient on bargain hunting interest.
Among other indices, the FBM-EMAS Index eased 53.59 points or 0.5 per cent, to end at 10,177.84, but the FBM-Small Cap Index managed to extend gains by 99.89 points, or 0.8 per cent, to 12,442.18.
The daily slow stochastics indicator for the FBM KLCI has dipped to the fully neutral region after last week's steep correction, while the weekly stochastics signal line triggered a fresh sell signal at the extremely overbought region. The 14-day Relative Strength Index (RSI) indicator has also fallen sharply to register a neutral reading of 52.15, while the 14-week RSI hooked down to flash a less overbought reading of 75.48.
Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator has triggered a fresh sell signal after last week's slump, while the weekly MACD indicator registered its first significant hook-down since the buy signal in August. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) indicator also registered a fresh sell signal for the first time since the buy signal early August, which is not good at all for short-term bulls.
Conclusion
Given the multiple sell signals on daily and weekly momentum and trend indicators for the FBM KLCI, expect blue chips to suffer further correction this week. However, this is viewed as a good opportunity for investors to bargain hunt, especially those who are staying on the sidelines at the moment, for attractive medium-term upside going forward. As for lower liners, prefer stocks in the construction, property, plantation and oil & gas sectors which are very likely to out-perform blue chips given the promising outlook next year.
Shares on Bursa Malaysia finally succumbed to profit-taking pressure late last week after rising for six straight weeks, pulling the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) down from a record high after foreign stock markets corrected on concern China could raise interest rates to contain imported inflation and as investors fretted over the possibility of Ireland defaulting on its sovereign debt.
Consequently, the FBM KLCI retraced 11.93 points, or 0.8 per cent last week to settle at 1,499.81, with Genting Bhd (-52 sen), Tenaga (-31 sen), Gamuda (-34 sen) and DIGI (-96 sen) accounting for most of the benchmark index's loss. Average daily traded volume ballooned to 1.64 billion shares with average value at RM2.27 billion compared with 1.27 billion shares and RM1.54 billion average in the previous week, boosted by strong buying interest in small-cap and lower-liner penny stocks as blue chips consolidated on profit-taking. As greater liquidity from the second round of quantitative easing in the US has increased the inflationary pressures on both soft and hard commodities, the rising risk of higher food prices will not be limited to China alone but will also affect the rest of the economies in this region. China's move to avoid an economic bubble that could burst later by imposing various measures to cool inflation and expansion may gain traction in the coming months, which could affect countries that are dependent on Chinese imports in the long run, especially the US.
In the immediate term, such a scenario raises the prospect of further strengthening in the yuan that will have similar effect on other regional currencies, including the ringgit. So, this short-term hiccup could attract greater foreign interest into the local equity market that netted RM1.8 billion in trading participation in October when the rest, including local institutions and retailers, were net sellers.
As for Ireland, it insists that it does not need any aid and does not want to relent to Germany's pressure to seek aid before a meeting of European finance ministers tomorrow. Worries about Ireland may continue until investors turn confident with measures introduced in the country's 2011 budget that will be unveiled on December 7.
Back on Bursa Malaysia, expect further mild corrections in the FBM KLCI this week towards the 1,478 technical support level but expect rotational buying interest in the second and lower liners to be sustained. This includes the oil and gas players that will benefit from tax incentives given to oil majors to explore marginal oil fields.
As domestic factors like a strong ringgit, launch of various projects under the Economic Transformation Plan, mergers and acquisitions, new listings of government-linked companies and a possible general election next year are likely to sustain expectations of a possible expansion in valuation multiple in the FBM KLCI, investors should regard a correction to this level as a buying opportunity to ride on a market rally next year.
While earnings growth next year is expected to taper off due to high base effect, it will still be in the low to mid-teens to support further appreciation in the index. So far, the third quarter earnings season has not seen any big disappointments and even an index bellwether like Maybank reported earnings that came within consensus expectations last Friday.
On the domestic economic front, only the foreign reserves data is due this week but investors will be keen to watch the US retail sales, factory production, housing starts, building permits and leading indicators figures to gauge the implications on rest of the world.
Spot month November FBM KLCI futures contract traded on Bursa Malaysia Derivatives closed at 1,491, losing a huge 24.5 points week-on-week and reversed to an 8.8-point discount to the cash index against the 3.76-point discount the previous Friday, as the sharp correction on external markets depressed the futures market.
Shares on Bursa Malaysia staged a catch-up rally on Monday after missing last Friday's global rally due to the Deepavali holiday, led by property and plantation stocks on optimism over the UEM Land-Sunrise merger and surging CPO prices respectively. The FBM KLCI rose 8.1 points to settle at 1,519.84.
Despite the mixed regional tone, the local market stayed vibrant Tuesday as situational plays on construction, water-related and stockbroking counters highlighted trading. The benchmark index managed to climb 6.69 points to close at a record high of 1,526.53.
Stocks extended gains on Wednesday, as active rotational interest in construction and oil & gas sectors offset the weaker regional tone. The FBM KLCI added 1.48 points to close at 1,528.01, off an early high of 1,531.99, lifted by gains in YTL Corp and HL Bank, on strong market volume totalling 1.74 billion shares worth RM2.27 billion, which was the highest daily volume in 10 months. The local market fell in a profit-taking correction on Thursday, with blue chips Maybank, PPB Group and Tenaga leading losses, but oil & gas stocks bucked the trend given the firm crude oil prices. The index lost 14.31 points or 1 per cent to close at the day's low of 1,513.7.
The market extended losses on Friday, as more investors cashed out trading positions amid concerns China may increase interest rates and as a majority of investors feared Ireland may default on its sovereign debt. Consequently, the index declined 13.89 points, or nearly 1 per cent, to settle at 1,499.81, off an intra-week low of 1,488.06, as losers bashed gainers 771 to 155 on strong volume totalling 1.72 billion shares worth RM2.39 billion.
Trading range last week expanded sharply to 43.9 points, compared to the narrow 8.7-point range the previous week, as selected blue chips corrected heavily due to keen profit-taking interest, but lower liners and small-cap stocks stayed resilient on bargain hunting interest.
Among other indices, the FBM-EMAS Index eased 53.59 points or 0.5 per cent, to end at 10,177.84, but the FBM-Small Cap Index managed to extend gains by 99.89 points, or 0.8 per cent, to 12,442.18.
The daily slow stochastics indicator for the FBM KLCI has dipped to the fully neutral region after last week's steep correction, while the weekly stochastics signal line triggered a fresh sell signal at the extremely overbought region. The 14-day Relative Strength Index (RSI) indicator has also fallen sharply to register a neutral reading of 52.15, while the 14-week RSI hooked down to flash a less overbought reading of 75.48.
Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator has triggered a fresh sell signal after last week's slump, while the weekly MACD indicator registered its first significant hook-down since the buy signal in August. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) indicator also registered a fresh sell signal for the first time since the buy signal early August, which is not good at all for short-term bulls.
Conclusion
Given the multiple sell signals on daily and weekly momentum and trend indicators for the FBM KLCI, expect blue chips to suffer further correction this week. However, this is viewed as a good opportunity for investors to bargain hunt, especially those who are staying on the sidelines at the moment, for attractive medium-term upside going forward. As for lower liners, prefer stocks in the construction, property, plantation and oil & gas sectors which are very likely to out-perform blue chips given the promising outlook next year.
Longer-term investors should look for buying opportunities, especially if the index drops further to last Friday's low of 1,488, which coincides with the 50 per cent Fibonacci Retracement (FR) of the rise from the pivot low of 1,445 on September 24 to the November 10 all-time high of 1,532, with the 61.8 per cent FR at 1,478 acting as a more solid support platform. Immediate resistance is now at 1,512, coinciding with the 23.6 per cent FR and the 10-day moving average, while stronger resistance reside at 1,524, the January 14 2008 peak, followed by the recent all-time high of 1,532.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
Market Outlook by Kaladher Govindan
Market Outlook by Kaladher Govindan
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