Profit-Taking Correction On Bursa Looms

Penny stocks such as E&O, Muhibbah, Ranhill, Zelan, BJCorp, Johan and Pelikan are expected to out-perform the broader market with huge percentage gains. Positive vibes from a strong performance on the New York Stock Exchange spilled over to the local market last week and helped the benchmark index break the year's high of 936 points. The positive tone came despite continued contraction in Malaysian exports and industrial production and the ruling coalition's inability to wrestle back the state and parliamentary seats from the opposition in Peninsular Malaysia.

The local stock market staged a breakout rally on Good Friday, with the blue-chip benchmark Kuala Lumpur Composite Index (KLCI) staging a decisive bullish breakout above the year high of 936 on strong buying momentum, copying sharp rallies in the region.

The KLCI soared 34.37 points, or 3.8 per cent, last week to close at a year high of 941.38, with daily trading volume and value ballooning to 832.8 million shares worth RM1.15 billion respectively, compared with the 579.4 million shares and RM840 million in the previous week. The daily average was the highest since November last year. The index's gain last week was driven mainly by plantation stocks with Sime Darby, IOI Corporation and KL Kepong taking the lead to contribute one third of the expansion.

Last week's positive trading momentum may continue in the early part of this week before a profit-taking correction sets in later on grossly overbought conditions. External factors will continue to be drivers. In the US, some major banks like Goldman Sachs, Citigroup and JPMorgan are expected to release their quarterly results this week and market expectations are for them to beat the consensus numbers with a relaxation in mark-to-market rules.

News that Goldman Sachs is planning a cash call to repay the US$10 billion (RM36.2 billion) that it received under the Troubled Asset Relief Program is an indication of improving earnings that could trigger similar moves from other industry players. Successful issuance of new shares to raise capital adequacy at a time when prices have recovered considerably will help some banks to pass the government stress tests at the 19 biggest US banks which will be concluded by the end of April. Nonetheless, this could evolve into concerns about earnings dilution and drag the market lower as what happened to Maybank and the local market before the recent rise.

As indicated previously, high-beta stocks had a good run-up in this current up-cycle that started on March 12. While plantation stocks ran up by an average 18 per cent with Sime Darby leading the pack with a 21.5 per cent surge, there are two notable laggards in the sector, Kulim and Hap Seng Consolidated, that are worth considering as both these stocks are trading at huge 50 per cent discount to their price-to-book (P/Bk) of 0.5x compared to the bigger boys which are trading at 1.8x to 3.4x. Even Boustead Holdings, another smaller player in the sector, has gone up by 19.4 per cent and trading at a P/Bk multiple of 0.8x.

They are also some other laggards among the index-linked big-cap but low-beta stocks like Berjaya Sports Toto, DiGi.com, Tanjung plc and PLUS that are worth investing in. Meanwhile, expect the positive sentiment to spill over into small cap and penny stocks this week as rotational plays take place.

Technical outlook

Bursa Malaysia shares extended their rally for a fifth straight trading day on Monday, lifted by strong regional gains on hopes government bailouts worldwide will revive global economic growth. However, stocks staged profit-taking dips in the next two days after a prominent analyst in the US warned of rising loan losses in banks due to excessive risk taking, while well-respected market gurus George Soros and Marc Faber predicted that the rebound in equities would falter as the market braced for a seventh straight quarter of falling profits.

Nonetheless, the local market reversed losses on Thursday, encouraged by sharp rallies in the region after overnight US stocks staged strong comeback from a two-day sell-off led by life insurers which rallied on strong prospects for a government bailout. On Friday, stocks staged breakout rallies as record high profits of US$3 billion at Wells Fargo for first quarter of this year and speculation that other banks will pass stress tests despite a deepening global recession boosted sentiment with bulls returning to pick up heavily sold down lower liners ahead of the weekend.

The KLCI bounced up from intra-week low of 907.87 on Wednesday's close to the week's high of 942.4 late Friday, prior to a strong closing ahead of the weekend. Week-on-week, the FBM-EMAS Index rallied 243.8 points, or 4.1 per cent, to close at 6,192.58, while the FBM-Small Cap Index (SCI) soared 393.9 points, or 6 per cent, to 6,979.37.

The daily slow stochastics indicator for the KLCI re-hooked upwards at the overbought zone with potential to trigger another buy signal (Chart 1), while the weekly indicator has risen towards the overbought zone. The 14-day Relative Strength Index (RSI) flashed an initial overbought reading above 70, but the 14-week RSI has improved with a bullish reading above 50.

However, trend indicators such as the daily and weekly Moving Average Convergence Divergence (MACD) expanded higher to suggest an emerging bullish trend. The bullish trend is confirmed by the expanding -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator, with the ADX line rising above the 25-point mark for a reading of 28.9 last Friday, which reinforced an outlook for a developing bull market.

Conclusion

While the increasingly short-term overbought momentum on the KLCI suggests profit-taking correction potential for this week, stronger trend indicators implied that this initial bear market rally could morph into a bull market rally. Moreover, last Friday's bullish breakout was supported by strong buying momentum in excess of one billion shares, which is the hallmark of a developing bull market if the strong daily trading volumes sustain for an extended period.

Nonetheless, investors should note significant KLCI resistance levels at 963, the September 18 2008 pivot low and the 200-day SMA at 969, which must be taken out convincingly to promote an extended rally towards more formidable resistance firstly at 983, the 50 per cent Fibonacci Retracement of the downfall from 1,164 pivot high of July 31 2008 to the 801 pivot low of October 28 2008, and then 994, the which is the 38.2 per cent FR of the sell-down from 1,305 pivot high of April 29 last year. A stronger ceiling this week is anticipated at the 1,000 psychological level.

Meantime, immediate support is revised higher to the January 7 pivot high of 936, then 926 and next at 920, the 23.6 per cent FR from the 1,305 pivot high. Stock-wise, expect plantation stocks such as IOI Corp, KLK and Sime Darby to surge further given the strong rally in CPO prices towards the RM2,300 a tonne mark, while penny stocks such as E&O, Muhibbah, Ranhill, Zelan, BJCorp, Johan and Pelikan should out-perform the broader market with huge percentage gains.

Article from Business Times.com