INDEX EXPECTED TO SUSTAIN RECOVERY

THE benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) drifted a tenth straight session to a near six-month low due to the absence of local fund support and positive domestic leads — before recovering as foreign selling evaporated.

Global growth optimism after the United States manufacturing surged to a 13-year high aided the recovery, which was led by small caps and oil and gas (O&G)-related stocks, which attracted rotational buying interest on revival of retail participation.

Week-on-week, the FBM KLCI rose 8.42 points, or 0.48 per cent, to close at 1,764 as gains on Hong Leong Financial Group (+38 sen), Kuala Lumpur Kepong Bhd (+24 sen), Petronas Gas Bhd (+20 sen) and Genting Bhd (+13 sen) offset losses on British American Tobacco (-22 sen) and Telekom Malaysia Bhd (-21 sen). Average daily traded volume and value moderated at 2.46 billion shares and RM1.93 billion, respectively, compared with the 2.54 billion shares and RM2.31 billion average in the previous week.

The benchmark index received a boost from Malaysia’s August trade data, which showed that exports and imports rose by 21.5 per cent and 22.6 per cent, respectively. Despite higher imports, trade balance was RM9.87 billion, still a tad higher than the forecast RM9.75 billion, but slightly lower than July’s RM8.03 billion.

The improving external demand and weaker ringgit should contribute positively to exports and economic growth in the second half. The economy is expected to grow by 5.2 per cent in the period, which would lead to a commendable full-year growth of 5.5 per cent.

In the last 20 years, the benchmark index showed strong tendency to rally in the two-week period prior to budget with a probability of 80 per cent, an average positive return of 2.6 per cent and an average total return of 1.8 per cent. It was usually followed by a correction in the postbudget period as most announced measures generally came within expectations. Chances for post-budget corrections for the same duration are 60 per cent with an average total return of -1.3 per cent and greater average losses of 3.4 per cent. From a total average return perspective, the FBM KLCI tends to underperform during the first two months of post-budget announcement before bouncing back for a year-end or New Year rally.

On the 2018 Budget measures, the underlying spirit should be towards prospering the rakyat and empowering the private sector. Naturally, with a general election around the corner, this budget is widely expected to empathise and appeal to a wider group of people.

Technical Outlook

The local benchmark index drifted for a tenth straight session to a near six-month low last Monday. It shed 0.8 points to end at 1,754.78, off an early high of 1,758.15 and low of 1,750.94 as losers beat gainers 538 to 288 on cautious turnover totalling 2.23 billion shares worth RM1.74 billion. It rebounded the next day to end a ten-day fall on easing foreign selling. It rose 4.89 points to close near session highs at 1,759.67, off an earlier low of 1,754.73 as losers narrowly edged gainers 410 to 405 on 2.16 billion shares worth RM2.07 billion.

Blue chips recovered further on Wednesday. The FBM KLCI added 2.17 points to close at 1,761.84 off an early low of 1,758.82 and high of 1,762.71 as gainers led losers 454 to 393 on steady turnover of 2.25 billion shares worth RM1.83 billion.

While blue chips eased into profit-taking consolidation the subsequent day, small cap O&Grelated stocks attracted strong rotational buying interest which revived retail participation. The FBM KLCI slid 2.75 points to settle at 1,759.09, after oscillating between a tight range bordering 1,757.61 and 1,761.16 as gainers led losers 487 to 360 on robust turnover of 3.15 billion shares worth RM2.06 billion.

Renewed rotational interest in small caps highlighted trading interest on Friday while blue chips recovered. The index climbed 4.91 points to end at the day’s high of 1,764 off an earlier low of 1,758.02, as gainers led losers 488 to 349 on total turnover of 2.49 billion shares worth RM1.95 billion.

The trading range for the bluechip benchmark index last week decreased to 13.06 points, compared with the 19.19-point range in the previous week after blue chips slipped into range-bound trade as foreign selling fizzled out.

For the week, the FBM Emas Index gained 66.35 points, or 0.53 per cent, to close at 12,597.64, while the FBM Small Cap Index rose 173.85 points, or 1.03 per cent, to 17,124.84 as small-cap stocks recovered.

A buy signal was triggered on the daily slow stochastics indicator for the FBM KLCI early last week, and is recovering, which suggests further near-term upside potential, but the weekly stochastics retained its bearish stance for the immediate term.

On the other hand, the 14-day Relative Strength Index (RSI) indicator hooked up for an improved reading of 45.67 following the rebound from ten straight trading days of losses, which is reinforced by a similar hook-up on the 14-week RSI with a reading of 52.37 as of last Friday.

The signal line on the daily Moving Average Convergence Divergence (MACD) trend indicator has levelled off, suggesting reducing downward momentum, but the weekly MACD signal line continued to deteriorate south, suggesting a lack of sustained strength. Also, the bearish trend signal on the 14-day Directional Movement Index (DMI) has yet to be reversed with a levelling Average Directional Index line suggesting a lack of trend.

Conclusion

Recovering technical momentum indicators, led by a buy signal on the daily slow stochastics indicator for the local benchmark index following last week’s oversold rebound shows promise for further recovery this week.

Furthermore, sentiment-wise, the outlook for a stronger global economic recovery should lend support as the local stock market stages belated recovery that coattails higher global markets.

Immediate resistance for the index will be at 1,771, matching the 50 and 100-day moving averages (ma), followed by the August 8 peak of 1,782 and then the double-top peak of September 13 high of 1,793 and June 16 peak of 1,796. Immediate support came from the recent low of 1,750, while the crucial 200-day ma uptrend support was at 1,738.

The improving external demand and weaker ringgit should contribute positively to exports and economic growth in the second half. The economy is expected to grow by 5.2 per cent in the period, which would lead to a commendable fullyear growth of 5.5 per cent.