Lower liner construction stocks such as MRCB, Ranhill and Tebrau should register profit-taking dips following last Friday's strong gains, says a research head. THE previous week's bullish breakout from the downtrend from the all-time high of 1,525 posted in January last year extended the rise of the benchmark Kuala Lumpur Composite Index (KLCI) to a near three-month high last week, before consolidation trimmed gains.
Subsequently, the KLCI surged 24.7 points, or 2.8 per cent, for the week to close at 919.07, while daily average trading volume and value expanded to 632.3 million shares and RM891.6 million respectively, compared with 360 million shares and RM535.8 million in the previous week.
The surge in the index was driven mainly by banking and plantation stocks. The rise in crude palm oil prices last week was attributed to an increase in crude oil prices because of tension in the Middle East, the dispute between Russia and Ukraine over gas prices and fees that hit supplies to 20 nations and the production cut undertaken by Opec. However, as the fact remains that demand is dropping faster than the cuts in production, the current bout of strength in commodity prices may not last.
Weaker commodity prices and softening global demand were the crucial factors that led to a continuous declination in Malaysian exports in the month of November that contracted 4.9 per cent year-on-year. Although the drop is slightly better than the consensus estimate of 5.7 per cent, worries abound that exports will continue to deteriorate as the global economy weakens further.
The economic condition in the US, for instance, is getting worse. Unemployment has risen to a 16-year high of 7.2 per cent and looks set to go up further if nothing drastic is done immediately. The world is hoping that US president-elect Barack Obama will embark on a huge fiscal stimulus programme when he takes over the Oval Office on January 20.
Locally, there are no major drivers for the KLCI this week except for the Kuala Terengganu by-election on Friday. More positive news with regard to additional fiscal stimulus to prop up the economy is likely to emerge over the next few days until the polls. This is likely to keep the momentum in the local market positive, at least temporarily.
The recent run-up in the index could have been a tempting moment for some to re-enter the market or play contra but investors are advised to exercise caution in their decisions as the current bear market rally is driven by sentiment and news flows and not by any change in economic and business fundamentals. A defensive approach is more suitable in the current environment for both institutional and retail investors with selective exposure to fundamentally strong big-cap plays and some growth stocks.
Technical outlook
The strong rally on global markets as investors reallocated funds into stock markets worldwide for the New Year after last year's heavy losses lifted the local market to extend window-dressing gains.
The local stock market staged a strong rally last Monday, triggered by more investors returning from the long year-end break to bargain hunt, encouraged by sharp rallies in the region on hopes government stimulus plans will help cushion the global economy from a severe recession. The KLCI rallied from an opening low of 901.84 to close 26.3 points, or 2.9 per cent, up at the day's high of 920.66, backed by strong buying momentum totalling 846 million shares.
Profit-taking the next day was well absorbed as renewed buying interest cushioned falls, ignoring the overnight retreat on Wall Street given concerns a slump in corporate profits will stretch well into 2009. Stocks retraced earlier gains on Wednesday, as profit-taking accelerated in afternoon trade after investors were shaken by a 7.3 per cent plunge in Indian stocks due to a record drop in the shares of Satyam Computer Services on news its financial accounts were falsified. The KLCI fell from a near three-month high of 936.63 but still managed to close 0.6 per cent higher for the day.
The market extended losses the next day, depressed by overnight falls in the US and regionally amid concerns over massive job losses and profit warnings from Intel and Time Warner, and a 12 per cent fall in crude oil prices to US$42.63 a barrel on a sharp increase in US weekly oil inventories. The KLCI subsequently dipped to low of 907.14, but managed a rebound on Friday after bargain hunters returned to prop up the index to close at the day's high of 919.07.
The daily slow stochastic indicator for the KLCI is easing back towards the neutral region to correct the short-term overbought momentum (Chart 1), while the weekly indicator has flattened with a mildly overbought reading. The 14-day Relative Strength Index (RSI) resumed a hook-up above the neutral mark with a reading of 63.7 last Friday, while the 14-week RSI extended higher with a reading of 40.4 after last week's buy signal.
Meanwhile, the daily Moving Average Convergence Divergence (MACD) trigger line has also expanded higher following a bullish crossing above the zero mark last week, reinforced by the weekly MACD indicator which extended upwards following the previous two weeks' buy signal. Meantime, the +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator expanded to strengthen last week's buy signal, with the ADX line registering a reading above 25 to qualify for an emerging bullish trend.
Conclusion
Improving technical momentum and trend indicators for the KLCI last week, reinforced by resurgent buying momentum, should ensure further upside for this week. Nonetheless, losses in US stocks last Friday, which were sparked by a surge in the unemployment rate to an almost 16-year high of 7.2 per cent in December, could act to tone down bullish sentiment on the local market in the early part of this week.
Looking at the daily KLCI chart, profit-taking and selling should be cushioned above the revised higher immediate psychological support level of 900, with the bullish breakout point near 888 and 880 acting as a stronger support zone. On the upside, immediate resistance is set at last week's high of 936, with stronger resistance from 940, and then 949.
Sector wise, plantation and oil & gas stocks may dip further given the sustained weakness on crude oil prices which continued to trade near the US$40 a barrel mark, while lower liner construction stocks such as MRCB, Ranhill and Tebrau should register profit-taking dips following last Friday's strong gains. Remain bearish in the near-term on banking stocks such as AMMB, BCHB and Maybank with further weakness likely as economic growth suffers from spillover recessions in developed markets.
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