FURTHER POTENTIAL UPSIDE?

THE local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to overcome an earlier selloff to a fresh two-year low last week.

It was aided by intermittent year-end window-dressing, which offset the weak external tone following the steep United States market correction sparked by worries over the pace of interest rate hikes and global growth momentum. A commitment by the US central bank chief to keep shrinking its balance sheet at the current rate after raising interest rates for the final time this year, worries over global growth and rising US-China trade tensions sparked the selloffs on global markets.

Still, week-on-week, the FBM KLCI managed to rise 8.32 points, or 0.5 per cent, to 1,670.28. Average daily traded volume last week remained low at 1.87 billion shares worth RM1.69 billion, compared with 1.84 billion shares valued at RM1.57 billion in the previous week.

Global equity markets reacted negatively to the US Federal Reserve’s (Fed) rate hike decision although it came within expectations. Even the cut in rate hike guidance from three to two next year did not assuage investors as most expected the policymaker to display a more dovish undertone.

Ongoing weakness in crude oil price is an added concern as private investments in petroleum and natural gas contributed significantly to the US’ year-to-date economic growth.

The US partial government shutdown last Saturday could aggravate the weak market sentiment further. The partial shutdown will affect more than 800,000 federal employees initially and could last very long.

Thus, local funds need greater resolve to continue their windowdressing activities, which were apparent last week. As foreigners are expected to sell on any significant rebound, the net outcome of such activities in the remaining five trading days of this year could be mild but investors can look into accumulating undervalued blue chips like Tenaga, Axiata, Petronas Chemical, Genting Bhd and Top Glove.

External concerns will continue to undermine investor sentiment next year and the dearth of domestic drivers make it difficult for the Malaysian equity market to stand out amid already pricier valuation vis-à-vis comparable developing peers.

Presuming the US will maintain tariffs on US$200 billion worth of imports from China, the FBM KLCI’s base case target for end-2019 is 1,780 after attaching a priceearnings ratio (PER) of 16 times on calendar year 2020 (CY20) earnings.

However, if the US-China trade war escalates, the benchmark index can trend lower to 1,490 levels under a worst-case scenario based on a CY20 PER of 13.4 times.

Technical Outlook

A selloff in key consumer and banking heavyweights on Monday dragged the FBM KLCI down to a two-year low. The index slumped 20.34 points, or 1.2 percent, to close at the day’s low of 1,641.62, off an earlier high of 1,660.66, as losers trashed gainers 690 to 179 on muted turnover of 1.47 billion shares worth RM1.18 billion.

Stocks sold off further the next day, depressed by overnight losses in the US. The FBM KLCI shed another 6.31 points to close at 1,635.31 on higher turnover of 2.26 billion shares worth RM1.91 billion.

The key index surged 1.2 per cent on Wednesday, lifted by renewed local fund buying commitments in key-index heavyweights. The FBM KLCI rose 20.35 points to close at the day’s high of 1,655.66 on moderate turnover totaling 1.87 billion shares worth RM1.89 billion.

Shares went into correction mode the subsequent day as the overnight US selloff following a less dovish statement from Fed chief after hiking rates for the final time this year heaped selling pressure on local stocks again. The FBM KLCI ended down 5.1 points to close at 1,650.56 on total turnover of two billion shares worth RM1.59 billion.

However, year-end windowdressing action managed to lift the FBM KLCI sharply higher on Friday. The index climbed 19.72 points, or 1.2 per cent, to settle at 1,670.28, off an early low of 1,642.79 and high of 1,672.21, as gainers edged losers 439 to 356 on slower turnover of 1.75 billion shares worth RM1.88 billion.

Trading range for the key index widened to 45.28 points last week, compared with the 25.28 points range in the previous week.

The daily slow stochastics indicator for the FBM KLCI rehooked upwards from oversold back into the neutral region, while the weekly indicator crossed up to initiate an early buy signal in the oversold region. The 14-day Relative Strength Index (RSI) indicator also hooked up sharply for a robust reading of 47.56, while the 14-week RSI indicator was lifted up to an improved reading of 35.59 as of Friday.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) is poised to trigger a buy signal, but the weekly MACD’s bearish expansion is still intact, requiring further strength to reverse the mediumterm bearish momentum. On the 14-day Directional Movement Index trend indicator, the +DI and DI lines have contracted on a declining ADX line, suggesting a pause of the current downtrend.

Conclusion

While Bursa Malaysia may extend rebound this week due to the year-end window-dressing season, strong resistance should emit from the severe US market correction last week, which dragged the tech-heavy index into bear market territory and the broader market index to the brink of it.

Nonetheless, locally, shortterm technical momentum for the benchmark index has turned positive following last week’s strong rebound, implying further potential upside before profittaking again checks gains.

Immediate upside hurdles will be from the declining 30-day and 50-day moving averages now at 1,681 and 1,693, respectively, followed by 1,700, with tougher resistance at 1,722, 1,742 and 1,762, the respective 61.8%FR, 50%FR and 38.2%FR of the rise from 1,657 low on June 28 to the 1,826.9 high of August 28.

On the downside, crucial supports will be from the recent low of 1,626, followed by 1,617, the 123.6% (Fibonacci Projection) FP level, next will be 1,593, the 138.2%FP.

Local funds need greater resolve to continue their window-dressing activities ... As foreigners are expected to sell on any significant rebound, the net outcome of such activities in the remaining five trading days of this year could be mild.

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