MARKET SET FOR FURTHER CORRECTION MARKET OUTLOOK

THE benchmark FTSE Bursa Malaysia KLCI (FMB KLCI) fell for four consecutive days last week, dragged down by profittaking and losses in key banking stock CIMB after Mitsubishi UFJ sold a significant stake in the banking group at a lower price.

Concerns over the United States Federal Reserve’s (Fed) definite plans to unwind its bloated US$4.5 trillion (RM18.8 trillion) balance sheet from next month was also a major dampener, but lower liners fared better, led by oil and gas (O&G)-related stocks, which rallied on resurgent bargain-hunting interest from retailers.

The FBM KLCI lost 15.29 points, or 0.86 per cent, week-on-week to close at 1,771.04 on Thursday as losses in Petronas Gas (-56 sen), CIMB (-40 sen), Genting Malaysia (-22 sen), IHH Healthcare (-20 sen) and Tenaga (-12 sen) overshadowed gains in RHB Bank (+18 sen) and Maybank (+15 sen). Average daily traded volume remained steady at 2.6 billion shares worth RM2.08 billion, compared with 2.62 billion shares worth RM2.15 billion in the previous week.

As expected the Fed maintained its fund target rate last week. It also kept earlier indication for another interest hike by this December and announced the quantitative easing tapering beginning next month, which came to the surprise of many as the policymakers were expected to be more dovish due to still tame inflation. The FBM KLCI seemed to have absorbed the news well last Thursday, having corrected by only 2.54 points, but that could be attributed to the fact it had been on a steady slide in the last six of seven trading days, after failing to break the year’s high of 1,797.

News of S&P’s downgrade of China’s credit rating by one step to “A+” on Thursday could be an immediate-term dampener if any negative reaction persists, but market expectations are for it to be temporary based on the price movements post similar downgrade by Moody’s last May.

No doubt, although gradual, continued hikes in the US interest rate will eventually lead to unwinding of US dollar carry trades but the timing of the tipping point is anybody’s guess. This factor could continue to undermine investor sentiment in the immediate term in the absence of fresh drivers. On the domestic front, expectations of an election rally could be another important catalyst for the FBM KLCI.

The domestic drivers are fortified by external factors like the Fed’s forecast of a stronger US economic growth of 2.4 per cent this year and 2.1 per cent next year, a lower unemployment rate of 4.1 per cent and subdued inflationary pressures at 1.9 per cent next year. China, too, is expected to maintain above six per cent economic growth next year, which will sustain our external demand.

Thus, the FBM KLCI could still see one more push late this year or in the first quarter next year before any sudden volatility, provided the General Election is held in March or April. As such, any price weakness in undervalued heavyweights should be viewed as a buying opportunity.

Technical Outlook

Blue chips on Bursa Malaysia eased on mild profit-taking on Monday as concerns persisted over the Fed’s plans to shrink its balance sheet. The FBM KLCI fell 2.67 points to close at 1,783.66 as losers edged gainers 457 to 406 on turnover of 1.99 billion shares worth RM1.61 billion. Profit-taking interest sustained the next day to drag blue chips lower, while the broader market was softer with rotational interest focused only on selected O&G stocks. The index fell seven points to close at 1,776.66 as losers beat gainers 517 to 337 on turnover of 2.01 billion shares worth RM1.92 billion.

The FBM KLCI ended lower for a third straight session on Wednesday, dragged down by CIMB after Mitsubishi UFJ announced the sale of a significant stake in it at a lower price. The index closed 3.08 points down to 1,773.58 as losers beat gainers 476 to 377 on robust turnover totaling 3.15 billion shares worth RM2.38 billion.

Blue chips stayed under profittaking pressure on Thursday while rotational interest on selective small caps and ACE Market stocks highlighted keen retail bargain-hunting interest. The index shed another 2.54 points to settle at 1,771.04 as losers edged gainers 473 to 385 on strong volume of 3.25 billion shares worth RM2.41 billionn.

The FBM KLCI trading range last week stabilised at 16.57 points, compared with the 16.35point range in the previous week.

The daily slow stochastics indicator for the FBM KLCI is in a negative bias following last week’s four-day correction, with the bearish position reinforced by a hook-down on the weekly stochastics indicator. The 14-day Relative Strength Index (RSI) indicator weakened to a bearish reading of 45.41, while the 14week RSI hooked down sharply to a weaker reading of 55.71.

Meanwhile, the daily Moving Average Convergence Divergence (MACD) trend indicator flashed a sell signal mid last week, and the weekly MACD indicator’s signal line is turning south again to suggest weaker trend ahead. The weaker trend signal is echoed on the -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator which crossed for a fresh sell signal, but the ADX line is turning down to indicate absence of trend.

Conclusion

With technical momentum and trend indicators weakening again following the four-day fall on the index, blue chips are likely to extend profit-taking consolidation with downside bias as buying momentum stays muted. However, small caps and ACE Market stocks may attract more vibrant retail participation.

Uptrend support for the index remains at 1,770, the 50-day moving average, with stronger supports seen from the end-August low of 1,757, and mid-July low of 1,751. Immediate resistance will be from the September 13 high of 1,793 and June 16 peak of 1,796, with tougher hurdles from 1,800, 1,815 and subsequently 1,823, the May 2015 peak.

Stock-wise, key defensive telcos and gaming stocks like Axiata, Digi.Com, Maxis, TM, Genting Bhd and Genting Malaysia are likely to retrace some of their recent gains before bargain hunters return to nibble again at cheaper levels.

With technical momentum and trend indicators weakening again following the four-day fall on the index, blue chips are likely to extend profit-taking consolidation with downside bias as buying momentum stays muted.