DOWNWARD CORRECTION LIKELY

THE FTSE Bursa Malaysia KLCI (FBM KLCI) pulled back from a strong rebound last Monday after the healthcare sector, which surged 3.1 per cent helped by strong gains in rubber glove stocks, encountered profit-taking resistance due to overbought conditions. By late week and following a religious holiday, stocks slipped lower in line with regional peers on China’s weak manufacturing data and concerns the elevated local Covid-19 infections may force the government to reimplement the Movement Control Order (MCO),

The FBM KLCI inched down by 6.78 points or 0.42 per cent weekon-week to close at 1,601.65 as gains in Petronas Chemical Group Bhd (33 sen), Sime Darby Plantation Bhd (18 sen) and Axiata Group Bhd (5.0 sen) were overshadowed by losses on Hartalega Holdings Bhd (-50 sen), Press Metal Bhd (-10 sen), Top Glove Corp Bhd (-8.0 sen) and Dialog Group Bhd (-8.0 sen). The average daily traded volume and value last week were at 7.2 billion shares and RM4.78 billion compared with the 7.75 billion shares and RM4.35 billion average the previous week as retail participation remained healthy with bargain-hunting interest in rubber glove makers continuing to highlight trade.

The high number of local Covid-19 cases that show no signs of abating are stoking fears about the return of the MCO despite the government saying it will pursue the strategy only at targeted areas in states where cases are rising. This could affect market sentiment this week and contribute to range-bound trading with more downside bias.

When the MCO was imposed for the first time in March last year, the equity market initially reacted negatively, with the FBM KLCI plunging to the year’s low of 1,207 immediately but rebounded strongly to above 1,600 level by mid-July.

Note that the benchmark index was already on steady downdrift from around 1,600 level since Malaysia recorded its first Covid19 case on Jan 24. The announcement of the first MCO on March 16 took effect from March 18 and was extended a few times until May 3 before restrictions were eased for business sectors to resume operation.

The strong rebound between March and July last year was driven mainly by stimulus measures and monetary loosening announced by governments and central banks, respectively, and strong interest in glove stocks. While the benchmark index is not expected to retest last year’s low if another targeted MCO is enforced due to its limitations to certain areas, the discovery of vaccines and progress in vaccinations, a knee-jerk correction is possible, but not a strong 400point rebound in the short-term as glove stocks can be subjected to downside volatility from progress in vaccinations and the government cannot keep announcing stimulus measures like before. This is because it has stretched its resources to revive the economy and has to engage measures like tapping into the National Trust Fund last week to avoid hitting the 60 per cent debt limit and six per cent fiscal deficit target for this year.

The best option is to expedite the vaccination process to ease movement restrictions, which will allow the economy to function normally, allowing it to harness the benefits of stimulus measures. The government should consider making Covid-19 vaccination mandatory if the take-up rate is slow.

Meanwhile, all eyes will be on Bank Negara Malaysia’s policy meeting this Thursday. Consensus expectations are for it to keep the Overnight Policy Rate at 1.75 per cent and guide for continuous accommodation for the rest of this year. However, there is room to ease further in this uncertain period as the inflationary pressures are tame despite rising from a lower base.

Crude oil prices and oil and gas stocks might see profit-taking pressure this week after Iran’s Deputy Foreign Minister Abbas Araghchi said a consensus had been reached with the United States over lifting of sanctions that cover its energy, auto, financial and ports sectors and negotiations had shifted to lift the remaining penalties on individuals. The possibility of more supply comes at the wrong time as the Organisation of the Petroleum Exporting Countries Plus Allies has agreed to increase production by two million barrels per day by end-July, and India, the third-largest consumer of crude oil, faces the daunting task of containing the pandemic and the corresponding economic backlash.

Technical outlook

Last week’s trading range for the blue-chip benchmark index expanded to 25.68 points, compared with the 18.98-point range the previous week. For the week, the FBM EMAS Index eased 42.17 points or 0.36 per cent to 11,798.29, while the FBM Small Cap Index fell 46.61 points or 0.25 per cent to 17,198.26.

On momentum indicators for the FBM KLCI, the daily and weekly slow stochastics rehooked downwards following last week’s weaker sessions, signalling further deterioration in market sentiment. The 14-day and 14-week Relative Strength Index indicators hooked back down, suggesting technical momentum remains weak in the near and medium term.

As for trend indicators, the daily Moving Average Convergence Divergence (MACD) eased lower near the mid-point. The weekly MACD indicator ’s signal line continued to slide lower, implying a weaker trend ahead. The -DI and +DI lines on the 14-day Directional Movement Index trend indicator crossed back for a sell signal, but the sliding ADX line continued to flag the absence of trending momentum.

Conclusion

Given that all momentum and trend indicators on the FBM KLCI display bearish signals following last week’s decline, a further downward correction this week is likely, with daily trading volumes whittling down as investors prefer to stay sidelined and await lower prices to bargain. Concerns over a potential re-introduction of the MCO to flatten the infection curve will be a major sentiment dampener. Sector-wise, rubber glove, healthcare and technology should continue to shine in the immediate term, given the strong demand and profit outlook amid the current surge in Covid-19 cases globally.

Immediate index support remains the 50-day moving average (MA) at 1,600, with key chart support cushioning downside from the 200-day MA at 1,577, and immediate upside hurdles from the recent highs of 1,635 and 1,642.

Concerns over a potential re-introduction of the MCO to flatten the infection curve will be a major sentiment dampener.

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