SMALL CAPS LIKELY TO OUTPERFORM

THE FTSE Bursa Malaysia KLCI (FBM KLCI) sank to another more than two-year low last

week.

This was due to a sharp sell-off in Tenaga Nasional Bhd shares below the RM12.00 level due to the sale of a substantial block of shares at a discount by a government-linked company, but subsequent bargain hunting interest lifted it up to close off lows ahead of the weekend.

In the meantime, on the broader market, construction and oil and gas (O&G)-related stocks enjoyed huge gains fuelled by optimism over revival of key megainfrastructure rail projects and buoyant global oil prices, sparked by good demand and the civil war strife in Libya.

For the week, the FBM KLCI fell 11.64 points, or 0.71 per cent, to 1,630.17, with losses on Tenaga Nasional Bhd (-34 sen), Malaysia Airports Holdings Bhd (-29 sen), Public Bank Bhd (-28 sen) and Petronas Chemicals Group Bhd (-26 sen) offsetting gains in Nestle Bhd (+90 sen) and PPB Group (+38 sen). Average daily traded volume and value improved to 3.5 billion shares and RM2.29 billion, respectively, compared with the 2.78 billion shares and RM1.91 billion average the previous week, as trading momentum increased on lower liners and small caps, specifically in the construction and O&G-related sectors.

Moderating global growth outlook and dynamics of local politics could continue to undermine recovery potential of the benchmark index this week with continued selling pressure from foreign institutions. Foreigners remained as net sellers last week after the International Monetary Fund lowered its global economic growth forecast for this year for the third time to 3.3 per cent from 3.5 per cent on slowing growth in major advanced economies and deteriorating trade subsequent to ongoing trade war.

Foreign selling contributed to sustained weakening of the ringgit despite the resilience in global crude prices. Meanwhile, expectations and the eventual resumption of the multibillion ringgit East Coast Rail Link project led to buying interest in the construction counters in the last two weeks.

Anticipate interest in undervalued O&G counters to continue this week with Brent crude ending last week on a positive note at US$71.55.

Technical Outlook Construction and O&G-related stocks led strong gains last Monday The FBM KLCI rose 2.54 points to settle at 1,644.35 after oscillating between an early high of 1,645.72 and low of 1,640.38, as gainers led losers 500 to 386 on robust turnover of 3.86 billion shares worth RM2.4 billion.

The market ended mixed the next day. The FBM KLCI eased 2.41 points to close at 1,641.94, after ranging between an opening high of 1,645.56 and low of 1,639.21 as losers beat gainers 430 to 390 on active trade totalling 3.46 billion shares worth RM2.36 billion.

While blue chips extended sideways trade on Wednesday, speculation on mega rail projects fuelled gains on construction-related stocks. The FBM KLCI dropped another 2.48 points to end at 1,639.46, off an early high of 1,642.13 and low of 1,635.89, but gainers led losers 441 to 371 on total turnover of 3.34 billion shares worth RM2.35 billion.

However, the following day foreign selling pressured the key index to the lowest close in more than two years. It lost 15.23 points to close at 1,624.23, off an opening high of 1,639.33 and low of 1,622.45 as losers swarmed gainers 620 to 275 on active trade totalling 3.57 billion shares worth RM2.27 billion.

Key index heavyweights moved back into sideways trade ahead of the weekend as global growth worries persisted, but trading momentum stayed strong in O&G and construction-related stocks, shored up by buoyant investor sentiment on these sectors. On Friday, the index gained 5.94 points to end the week at 1,630.17, off an early low of 1,623.44 and high of 1,631.09, as losers edged gainers 411 to 399 on total turnover of 3.26 billion shares worth RM2.07 billion.

Trading range for the local blue-chip benchmark index last week increased to 23.27 points, compared with the 19.15 points range the previous week, as it dipped to the lowest close in more than two years. For the week, the FBM Emas Index eased 39.4 points, or 0.34 per cent, to 11,561.46, but the FBM Small Cap Index added 241.79 points, or 1.84 per cent, to 13,365.62, as smallcap stocks sustained their uptrends, especially those in the O&G and construction-related sectors.

Last week’s sell-off to another fresh low in more than two years pressured the daily slow stochastics momentum indicator for the FBM KLCI to issue a weak sell signal at the oversold borderline, but the weekly indicator’s trigger line deteriorated further south into the oversold zone. However, on the 14-day Relative Strength Index (RSI) indicator, it hooked back up to register a bullish divergence following last Friday’s mild rebound, but the 14-week RSI retreated to a weaker reading of 33.66.

On the other hand, the daily Moving Average Convergence Divergence (MACD) trend indicator’s trigger line turned lower to register bearish momentum, reinforcing the negative sell reading on the weekly MACD indicator. In the meantime, the –DI and +DI lines on the 14-day Directional Movement Index trend indicator expanded bearishly with the average directional index line rising to imply a renewed downtrend.

Conclusion

Except for the bullish divergence signal on the 14-day RSI momentum indicator for FBM KLCI, which suggested good rebound potential this week, most other technical momentum and trend indicators remained bearish.

Nonetheless, note that while the local benchmark index is likely to consolidate given the weak technical signals, the small cap sector displayed resilient upward momentum, hence they are likely to outperform blue chips in the immediate term.

On the index, crucial supports are from last Thursday’s low of 1,622, followed by the November 2016 low of 1,614 and psychological 1,600 level, while overhead resistance is from the mid-Bollinger band now at 1,649, followed by 1,657, 1,674 and subsequently the March 19 high of 1,694. Formidable upside hurdle is likely from the 200-day moving average level at 1,714.

Moderating global growth outlook and dynamics of local politics could continue to undermine recovery potential of the benchmark index this week with continued selling pressure from foreign institutions.

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