FAVOURABLE OPEC DEAL MAY LIFT MART

DESPITE the grossly oversold technical condition, strengthening ringgit and oil prices, the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) struggled last week to recover from the previous week’s sell-off to a fresh eight-month low, as selling pressure sustained on key blue-chip heavyweights, ignoring the firmer regional markets’ tone.

The FBM KLCI shed 0.26 per cent to 1,717.23, with falls on BAT (RM1.52) and Hong Leong Bank (46 sen) accounting for most of the losses. Average daily traded volume fell to 2.08 billion shares worth RM2.30 billion, compared with 2.57 billion shares worth RM2.36 billion previously.

The index needs a strong push to recover from the selling streak and the Organisation of the Petroleum Exporting Countries (Opec) meeting on Thursday can provide it if the cartel and Russia agree to raise the production cuts to more than 1.8 million barrels a day or beyond the widely predicted nine- month extension. The existing expiry date for production cuts is end-March 2018.

The recent rally in crude oil prices has already taken into account a possible extension of this deadline to December next year.

Brent crude oil price closed 0.5 per cent higher to US$63.86/barrel last Friday while West Texas Intermediate closed at US$58.95/barrel (+1.6 per cent).

US shale output is the main “party spoiler” as it is expected to rise by 35 per cent year-on-year to 6.1 million barrels per day this month, according to US Energy Information Administration. However, the gap between complete and incomplete wells may stifle efforts to boost supply within the next twelve months. Thus, possibilities are not remote for Brent to surpass US$70/barrel level early next year.

This could act as a further driver for ringgit that has been strengthening in recent weeks, despite the lacklustre capital market, which could be attributed to repatriation of exports earnings by exporters. Foreigners has turned net buyers again last week after a larger net influx of RM212 million last Wednesday.

Backed by stronger-than expected economic growth, recovering corporate earnings and relatively undervalued position compared with its peers, the local bourse should wake up soon.

The 14th General Election could be a major stumbling block for foreigners currently, but the monsoon rainy season may delay it until late March or April next year, or technically until August next year. That aside, we have November Nikkei Malaysia PMI number released this Friday that should provide some indication on future exports and trade surplus, which have a direct link to ringgit’s strength.

Technical Outlook

Bursa Malaysia shares edged lower on Monday, as investors mostly stayed sidelined amid uncertainties over US tax reforms and geopolitical tensions in the Middle East.

The FBM KLCI shed 3.3 points to settle at 1,718.36, off an early high of 1,725.35 and low of 1,717.45, as losers trashed gainers 663 to 256 on cautious turnover totalling 1.97 billion shares worth RM2.14 billion. While the local index recovered the following day helped by a rebound in oil and gas and plantation heavyweights, construction and property related stocks slumped on fears over the adverse impact of an indefinite freeze on high-end property projects.

The FBM KLCI rose 2.32 points to close at 1,720.68, off an early high of 1,722.73 and low of 1,716.45, as losers swarmed gainers 684 to 240 on higher turnover totalling 2.27 billion shares worth RM2.37 billion.

Shares rose Wednesday, on bargain-hunting in select index heavyweights. The local bourse gained 2.86 points to close at 1,723.54, off a high of 1,727.77 and low of 1,721.36, as gainers edged losers 589 to 318 on turnover totalling 2.24 billion shares worth RM2.61 billion. Stocks fell the next day, led by blue chips. The FBM KLCI shed 2.27 points to close at 1,721.27, off a high of 1,728.18 and low of 1,720.59, as losers edged gainers 445 to 433 on slow turnover of 2.09 billion shares worth RM1.86 billion.

The local market extended losses on Friday as selling pressure sustained. The FBM KLCI lost another 4.04 points to close at 1,717.23 as losers edged gainers 521 to 344 on turnover totalling 1.83 billion shares worth RM2.52 billion. Trading range for the local blue-chip index last week was 14.92 points, compared with 26.25 points in previously, as blue chips stayed depressed near eight-month lows. For the week, the FBM EMAS Index slipped 0.19 per cent to 12,393.24, while the FBM Small Cap Index fell 0.94 per cent to close at 16,920.88.

Due to last week’s failure to rebound, the daily slow stochastic momentum indicator for the FBM KLCI stayed oversold, while the weekly indicator is inching deeper towards the oversold territory.

The 14-day Relative Strength Index (RSI) indicator stayed mildly oversold with a low reading of 31.91, while the 14-week RSI declined further to read 36.14 as of last Friday.

On trend indicators, the signal line on the daily Moving Average Convergence Divergence (MACD) sank deeper into negative territory, while the weekly MACD dipped lower to reinforce the bearish daily trend reading. Meantime, the +DI and –DI lines on the 14-day Directional Movement Index (DMI) trend indicator stayed apart bearishly to suggest a persistent downtrend.

Conclusion

Given the more negative technical indicators on the FBM KLCI, the near-term outlook has turned decisively bearish.

Expect stocks to stage a rebound this week, on the grossly oversold technical momentum, which may attract buyers to oversold stocks. However, strong buying momentum is needed for the index to neutralise bearish momentum and encourage an oversold rebound ahead.

Key Fibonacci Retracement (FR) support for the index will be at 1,705 (50 per cent FR) and 1,683 (38.2 per cent FR), where the index may trough ahead of oversold rebound. Immediate overhead resistance will be at the falling 10day and 30-day moving averages now at 1,723 and 1,737 respectively, then 1,750, next will be 1,758, the 100-day moving average.

Expect stocks to stage rebound this week, due to the grossly oversold technical momentum, which could attract buyers to bargain oversold stocks. However, strong buying momentum is needed for the index to neutralise bearish momentum and encourage an oversold rebound ahead.