HIGH VOLATILITY LIKELY TO PERSIST

THE benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) went on a roller-coaster ride last week, dipping to a fresh fiveweek low triggered by the slump in the United States stock market.

The selloff on Wall Street was sparked by worries that rising US bond yields and inflation may quicken the pace of interest rate hikes by US central bank.

The FBM KLCI sank 50.66 points, or 2.7 per cent, to 1,819.82, with most of the losses coming from Hong Leong Bank (-90 sen), Petronas Gas (-80 sen), Hap Seng (-71 sen), Genting Bhd (-64 sen) and Petronas Dagangan Bhd (-58 sen). Average daily traded volume rose to 3.13 billion shares worth RM3.28 billion compared with 2.95 billion shares worth RM2.88 billion in the previous week.

Market sentiment should remain weak this week due to external uncertainty and liquidation as some investors look forward to splurging their recent gains on Chinese New Year (CNY) celebrations on Friday and Saturday. (Bursa Malaysia is closed from Thursday afternoon onwards this week).

The depreciation in oil prices and ringgit are additional dampeners that could induce fund outflows and exert pressure on the blue-chip index, which could retest the 1,800 support level this week.

While market sentiment usually improves post-CNY, this year’s high of 1,880 may not be revisited soon as investors await the outcome of the fourth-quarter 2017 corporate reporting season and external markets remain volatile until the US Federal Reserve (Fed) meeting on March 20 and 21.

Consensus expectations are for Fed new chairman Jerome Powell to raise rates by another 25 basis points. Conditions could improve for US equities after a potential rate hike if the Fed can pacify investors about its gradualist monetary policy approach.

The shrinking gap between 10year Malaysia Government Securities and 10-year US Treasury yield will exert more pressure on foreign fund flows and the ringgit. However, buying support from local funds could mitigate the downside pressure on equities to some extent. Investors may want to take profits and await cheaper re-entry, probably in the second half. The volatility in blue chips should be a good opportunity to trade, especially in stocks related to banking, construction, consumer, gaming and utilities.

Technical Outlook Bursa Malaysia shares fell due to profit-taking on Monday following Friday’s sharp correction on Wall Street, sparked by concerns that rising US bond yields and inflation may quicken the pace of interest rate increases. The FBM KLCI slumped 17.41 points to close at 1,853.07 on total turnover of 2.65 billion shares worth RM2.84 billion.

Stocks ended sharply lower the next day due to the selloff spillovers from overnight US and regional markets, which saw a record intra-day loss on the Dow Jones Industrial Average. The FBM KLCI tumbled 40.62 points, or 2.2 per cent, to settle at 1,812.45 on very active trade totalling 5.2 billion shares worth RM5.32 billion.

The local market recovered on Wednesday helped by the overnight rebound on Wall Street, but the afternoon fall in US stock index futures spooked regional stocks and eroded their earlier gains. Still, the FBM KLCI closed up 24.23 points, or 1.34 per cent, at 1,836.68 on lower turnover of 3.32 billion shares worth RM3.51 billion.

Blue chips stayed range-bound on cautious trade the following day, with overhanging concerns over rising US interest rates and inflation restricting recovery momentum. The benchmark index ended 2.76 points higher at 1,839.44 with 2.05 billion shares worth RM2.08 billion changing hands.

The overnight slump in the US stock market, with major indexes sliding more than 10 per cent from record highs into correction territories, again spilled over to regional and local markets on Friday. The FBM KLCI fell 19.62 points, or 1.1 per cent, to settle at 1,819.82 as losers trashed gainers 900 to 208 on moderate turnover of 2.45 billion shares worth RM2.67 billion.

The FBM EMAS Index lost 401.52 points, or three per cent, to 12,975.06 while the FBM Small Cap Index plunged 901.61 points, or 5.3 per cent, to close the week at 16,120.74.

Following last week’s steep selloff, the daily slow stochastic momentum indicator for the FBM KLCI has fallen into the neutral region but is hooking up due to last Friday’s rebound. The weekly indicator’s signal line hooked down in an overbought territory and is set to trigger a sell. The 14day Relative Strength Index (RSI) indicator had turned bearish with a weak reading of 48.27 as of last Friday, while the 14-week RSI registered a steep decline with a bearish reading of 59.71.

The daily Moving Average Convergence Divergence (MACD) turned southwards following a sell signal early last week, while the weekly MACD indicator’s signal line has hooked down, suggesting exhaustion of the uptrend. Meantime, the +DI and –DI lines on the 14-day Directional Movement Index (DMI) trend indicator crossed for sell on a falling ADX line, suggesting the end of uptrend momentum.

Conclusion

Due to visible deterioration on trend and momentum technical indicators, investors should expect the recent high volatility to persist for another week. Despite last Friday’s rebound on Wall Street, downside risk persists unless there is proof that leveraged low-volatility, or so-called shortvolatility bets, which are some derivative products blamed for the recent huge stock price swings, are unwound.

On the index, monitor the crucial resistance-turn-support level at 1,796, the June 2017 peak matching the recent low, which must hold to prevent further correction potential towards next support from 1,778, the 38.2%FR of the 1,614 low of Noember 2016 to the recent 1,880 high. Failure of this support means that the 50%FR at 1,747 should be tested for resilience. Immediate resistance will be 1,840, mirroring the January 9 high, with the February 2 peak of 1,880 acting as a formidable hurdle.

The volatility in blue chips should be a good opportunity to trade, especially in stocks related to banking, construction, consumer, gaming and utilities.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.