Market turns cautious
Research houses say technical indicators show overbought situation
PETALING JAYA: Investors are cautious and this may be what is keeping the equity markets in check after the recent highs achieved since the beginning of the year.
But moving forward, analysts do not discount a possible Chinese New Year rally on the cards should risk appetite perk up. Risk sentiment has also recovered in the US markets.
“The 14th General Election is also around the corner and stocks might get a further boost from improving fundamentals and a low base for sentiment. Traditionally, the days leading up to the Chinese New Year is a good excuse to buy stocks as well, so stocks in general might post more gains across the board,” a dealer said.
The cautious mood can be seen in the US markets, where there was a two-day selloff on the Dow Jones Industrial Average (DJIA) earlier in the week. Notably, with the local bourse closed on Jan 31 and Feb 1, there was strong selling in the days leading up to the two-day break, with losers broadly outnumbering gainers while the benchmark FBM KLCI was mostly intact holding on to its gains.
In the first two trading days of the week, the DJIA saw 507.39 points shaved off although it gained 72.50 points or 0.28% on Wednesday. The FBM KLCI closed at 1,868.58 points on Jan 30, losing a marginal 1.94 points or 0.10%. Although the drop in the key index was marginal, decliners outpaced gainers 794 to 252.
In a technical report that was published on Jan 30, Maybank Investment Bank Research said the FBM KLCI had already surpassed both its target of 1,840 and 1,867 over the three days prior to Jan 30.
The research house noted that in the yearto-date period, the benchmark index had registered gains that were in line with regional peers.
“The rally has lifted the benchmark markedly above the 161.8% Fibonacci Extension at 1,851, and we believe the index is now trading in an extreme overbought zone,” it said.
“The silver lining here is that we have yet to see any clear visible reversal signal with the exception of bearish divergence in smaller timeframe. Therefore, we believe the current upward momentum could still last awhile longer, but gains will likely be capped at around 1,884 to 1,896 for now,” it said, adding that investors should anticipate intermittent profit-taking now and then.
HLIB Research said in a technical note that the MACD indicator continued to suggest that the uptrend for the FBM KLCI was intact but also noted that indicators showed that the market was slightly overbought.
“Hence, we think the KLCI’s upside could be limited around 1,860 to 1,870. Support will be pegged around 1,830 to 1,840,” HLIB said.
On the fundamental side of the equation, analysts pointed out that the strength of the rally would be dependent on earnings and how they pan out both locally and overseas.
“Their fortunes are usually generally tied as we are an open economy that is part of the global economy.
“Valuations for the FBM KLCI are generally at 17 times historical price to earnings ratio (PER) while the DJIA is at 21.42 times,” a market observer said.
He added that for valuations or prices to rise from such levels would require companies to deliver on the earnings front.
“However, the sentiment has also improved now and from a low base so the overbought conditions could sustain for a while notwithstanding risks from overseas markets,” he noted.
On the earnings front locally, there was strong buying seen in the banking stocks on Moday.
Analysts attributed the buying into banking stocks on anticipation of improved outlook after the recent interest rate hike by Bank Negara.
Analysts said the upcoming December 2017 earnings reporting season would be closely watched by the market as it would indicate the health of the rally.
Companies would have to submit their quarterly report for the period ending Dec 31 2017 by Feb 2018 or two months after the previous quarter ended.
“People would want to watch the coming earnings reporting season for clues to the rally: whether it’s sustainable or not,” he said.