Monday, February 28, 2011

KL Bourse's Technical Rebound On Horizon

2011/02/28 Article from

Investors should still seriously consider accumulating blue chips on weakness, especially those in the banking, consumer, construction, plantation, property and oil & gas sectors, says a head of research.

Stocks suffered another bout of selling which accelerated late last week as investors reduced exposure given concerns escalating tensions in the Arab world, specifically in Libya, will disrupt crude oil supplies which caused prices to spike up above the US$100 (RM305) a barrel mark. Hence, increasing worries rising inflation would stall the global economic recovery.

As a consequence, the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) gave back 28.29 points, or 1.86 per cent, last week to settle at 1,489.27, a fresh two-month low, with Axiata (-27sen), MISC (-73 sen), KLK (-RM1.82), CIMB (-17sen) and Sime Draby (-18 sen) representing two-thirds of the index's loss. Average daily traded volume and value slowed moderately to 1.73 billion shares and RM2.11 billion respectively, compared to the 1.77 billion shares and RM2.12 billion average the previous week.

Tensions in the Middle East and North Africa (Mena) have rekindled worries about high oil prices exacerbating inflationary pressures and dampening purchasing power that could nip the nascent global economic recovery in the bud. Things went from bad to worse when the unrest spread to Libya, one of the 12 members of the Organisation of Petroleum Exporting Countries (Opec). Libya contributed 5.4 per cent to the oil cartel's crude output of 29.4 million barrels last month. Although Libya's oil output of 1.6 million barrels per day (bpd) is insignificant compared to global supply of 89.6 million bpd, news about attack on its oil facilities led to concerns about prolonged disruptions and possibilities of similar attack on other oil facilities. Concern about unrest spreading to other key oil exporters like Saudi Arabia, Iran and Iraq that contribute about 29 per cent, 13 per cent and 9 per cent to Opec's supply could sustain the volatility in oil prices and global equity markets, including Malaysia's.

While nobody knows for sure how things will evolve, this could be a buying opportunity if the situation in Libya does not prolong and the revolts do not spread. For some investors it pays to be greedy when others are fearful and they may be right. To note, Saudi Arabia has already promised an infusion of US$35 billion in various social benefits to avert a crisis and has pledged to turn on the tap from its 4 million bpd spare capacity to meet any shortfall in global crude oil supply.

Based on January's data there was already an oversupply situation of 2.2 million bpd as demand contracted by 2.9 per cent month-on-month with second biggest consumer like China trying hard to cool its economy. The US, being the biggest consumer, has increased its energy efficiency over the last four decades and is said to be less susceptible to any direct effect from an oil price increase as a jump of US$10 is expected to dampen growth by only 0.2 per cent.

The biggest test now is for global superpowers to come together and exert their influence in solving this crisis and managing inflationary expectations through commitment in releasing their emergency oil reserves, raising interest rates and allowing currency appreciation, among others. The fact that we are almost at the tail-end of the winter season in the Northern Hemisphere could contribute to lower demand as well.

There is no doubt that international trade could be a drag on our economy this year given the uncertain global economic environment but the current favourable employment conditions, ample liquidity and cheap financing opportunities are expected to still lead to a strong domestic demand-spurred growth of 6 per cent in 2011 as private consumption and investments thrive. Further appreciation potential in ringgit could be a dampener on inflation as well. On the back of a still robust economy, favourable commodity prices and corporate earnings growth (the earnings reporting season so far is within expectation and contained less unfavourable outcomes), there are still good reasons to accumulate blue chips in the heavyweight sectors like banking and plantation apart from good small and midcap plays in other sectors like oil and gas, property and automotive.

This week will see the release of important economic indicators like core inflation, non-farm payroll numbers and factory orders in the US while locally the trade numbers will be released on Friday. No major surprises are expected.

Technical outlook

Spot month February KLCI futures contract traded on Bursa Malaysia Derivatives tumbled 33.5 points, or 2.2 per cent, week-on-week to 1,482.5, deteriorating to a 6.77-point discount to the cash index, compared to the minor 1.56-point discount the previous Friday. Long liquidation and panic selling forced the bulls to cut losses on their futures trading positions.

Share prices on Bursa Malaysia recovered from an early sell-off last Monday sparked by concerns over spreading anti-government demonstrations in the Arab world, as investors returned to nibble on blue chips while lower liners extended profit-taking corrections. The FBM KLCI climbed 8.29 points to close at 1,525.85, off a high of 1,527.09.

The local market tumbled the next day, in line with the retreat on key regional markets on profit-taking activities as investors were rattled by the escalating tensions in the Arab world, and sentiment was further weighed down after Moody's Investors Services changed its outlook on Japan's Aa1 sovereign rating to negative from stable on Tuesday. The FBM KLCI lost 12.22 points to close at 1,513.63.

Stocks extended their correction on Wednesday amid worries instability in the Arab world would disrupt oil supply shipments, pushing prices sharply higher to derail a global economic recovery. The FBM KLCI ended 2.52 points lower at 1,511.11. The local market tumbled the following day in line with the region on concern increasing civil strife in Libya will disrupt oil supplies, which sent crude oil prices above the US$100 a barrel mark, and stall the global economic recovery. The FBM KLCI lost 21.24 points, or 1.4 per cent, to close at the day's low of 1,489.87, as losers swarmed gainers 863 to 116 on heavy volume of 2 billion shares worth RM2.62 billion.

The market rebounded on Friday after oil prices retraced to US$97 a barrel overnight from a 29-month high of US$103.4 as the US, Saudi Arabia and International Energy Agency gave an assurance that they can compensate for any disruption to Libyan shipments. However, the local benchmark index lost 0.6 points to close at the day's low of 1,489.27, off an early high of 1,499.44, pressured by falls in Tenaga, Maybank and KLK, as gainers led losers 524 to 300 in cautious trade which totalled 1.39 billion shares worth RM1.79 billion.

The trading range last week expanded to 37.82 points, compared with 27.02 points in the previous week.

The daily slow stochastics trigger line for the FBM KLCI has just dipped below the oversold level following last week's sell-down, which was mirrored by the weekly indicator, suggesting an initial oversold technical condition which could spark a rebound this week. The 14-day Relative Strength Index (RSI) indicator has also dipped to level off with a low reading of 35.47, while the 14-week RSI has declined to a neutral level of 51.1.

Meanwhile, the daily Moving Average Convergence Divergence (MACD) trend indicator signal line registered a further decline, copying weakness on the weekly MACD indicator. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) indicator registered a mild expansion to suggest a developing downtrend.


While trend indicators for the FBM KLCI continued to weaken, initial oversold readings on momentum indicators suggest a technical rebound is likely this week. Moreover, further strength in US stocks last Friday encouraged by stronger economic data and corporate earnings should boost regional sentiment and support recovery early this week. Nonetheless, the rebound upside may be capped if the Libyan situation deteriorates. All in all, investors should still seriously consider accumulating blue chips on weakness, especially those in the banking, consumer, construction, plantation, property and oil & gas sectors, for medium-term gains.

Immediate FBM KLCI resistance is foreseen at 1,511, the 38.2 per cent Fibonacci Retracement (FR) of the rise from the 1,474 low of November 29 2010 to the record high of 1,576.95 of January 6, with subsequent hurdles at 1,525, the 50 per cent FR, followed by 1,537, the 38.2 per cent FR and next at 1,552, the 23.6 per cent FR.

On the downside, it should still defend the significant bottom at the low of 1,490 on February 11, which must hold to prevent further downside risk towards the next significant support from the 1,474 low. This level should hold to prevent a slide further to 1,450, which is the 38.2 per cent FR of the rise from 1,243 low of May last year to the record high of 1,576.95 of 6 January.

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