FURTHER CORRECTION LIKELY

THE FTSE Bursa Malaysia KLCI (FBM KLCI) tumbled to a fresh threemonth low last week after the US consumer price index (CPI) for April surged to a 40-year high, fuelling recession fears. The fall came despite gains in banking shares after Bank Negara Malaysia raised the Overnight Policy Rate by 25 basis points.

However, the market managed to rebound ahead of the long weekend break, mirroring recoveries in global markets, mostly helped by technology, plantation, oil and gas (O&G) and telco heavyweights.

For the week, the FBM KLCI shed 19.93 points, or 1.27 per cent, to 1,544.41, with losses from Press Metals Holdings (-34 sen), Public Bank (-6.0 sen), IOI Corp (-24 sen), KLK (-RM1.42) and Petronas Chemicals (-21 sen) offsetting gains in Tenaga (+18 sen) and Petronas Dagangan (+48 sen). Average daily traded volume last week mildly improved to 3.03 billion shares compared to 2.89 billion shares the previous week, but average traded value dwindled to RM2.24 billion against the RM2.41 billion average the previous week.

Stronger-than-expected first quarter gross domestic production (GDP) data helped the FBM KLCI rebound slightly from heavy losses on Thursday. The GDP growth of 5.0 per cent yearon-year came stronger than consensus expectations of 4.0 per cent, thanks to a 6.5 per cent yearon-year rebound in services sector (first quarter of 2021: -2.3 per cent) and slower contraction in construction and mining sectors. Higher domestic consumption and private investment lifted the aggregate domestic demand higher to 4.4 per cent year-onyear in the first quarter of 2022.

Looking ahead, the full-year forecasts by Bank Negara Malaysia (5.3 to 6.3 per cent) and the Finance Ministry (5.5 to 6.5 per cent) should be within reach.

The economic recovery should translate into better corporate earnings and interest in local equities as most blue chips are trading at attractive valuations, with more than 65 per cent of the FBM KLCI 30 component stocks providing a minimum capital gain of 12 per cent based on consensus target price forecasts.

This is not surprising as the benchmark index is trading at consensus calendar year 2023 price-to-earnings ratio of only 13.6 times, which is about 10 per cent discount to comparable peers. As such, investors’ focus will be on the first quarter corporate results season, which will be concluded by the end of this month. Most announcements so far were within expectations.

Malaysia’s trade data for April is due this Thursday. Consensus is expecting a slightly slower growth of 20.7 per cent and 26.1 per cent year-on-year in exports and imports versus 25.4 per cent and 29.9 per cent year-on-year, respectively, in March.

Meanwhile, China is scheduled to release its April industrial production and retail sales numbers today. The industrial production growth for April is expected to be only one-tenth of March’s 5.0 per cent year-on-year. As such, all eyes will be on the People’s Bank of China this Friday as it is slated to announce its one-year and five-year loan prime rates.

Technical outlook

The FBM KLCI sold off for a third straight session to close at a fresh two-month low on Monday, dragged down by falls on global peers.

The index lost another 15.16 points to settle at 1,549.18, as losers swarmed gainers 827 to 183 on active trade totalling 3.22 billion shares worth RM2.03 billion. O&G and plantation stocks led falls on Tuesday amid worries soaring inflation will slow economic growth, but rebound in telco heavyweights helped lift the index. The FBM KLCI ended up 5.4 points at 1,554.58, as losers beat gainers 640 to 331 on slower turnover of 2.75 billion shares worth RM2.26 billion.

Blue chips stayed range-bound on Wednesday. The FBM KLCI added 1.35 points to close at 1,555.93, as gainers edged losers 443 to 440 on reduced turnover totalling 2.4 billion shares worth RM1.91 billion.

The index fell to a fresh threemonth low on Thursday. The FBM KLCI slumped 17.13 points, or 1.1 per cent, to end at 1,538.80, as losers trashed gainers 874 to 209 on higher turnover of 3.61 billion shares worth RM2.5 billion.

Stocks staged a rebound ahead of the long weekend break, mirroring recoveries in global markets. The index gained 5.61 points to close 1,544.41 on Friday as gainers led losers 658 to 318 on a total turnover of 3.16 billion shares worth RM2.51 billion.

Trading range for the blue-chip benchmark index more than halved to 25 points last week, compared to the large 51.24-point range the previous week, as the index sold off to a fresh threemonth low before bouncing back, helped by some mild bargainhunting interest. For the week, the FBM EMAS Index slipped 194.76 points, or 1.74 per cent, to 11,010.8, while the FBM Small Cap Index sank 626.64 points, or 3.78 per cent, to 15,968.31.

On technical momentum indicators, while the daily slow stochastics for the FBM KLCI sank deeper into oversold territory, the weekly indicator’s signal line has been pressured into the neutral region. The 14-day Relative Strength Index (RSI) indicator staged a minor hook-up following last Friday’s mild rebound, but the 14-week RSI continued to travel south to reflect bearish momentum.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) trigger line sank deeper into bearish territory, while the weekly MACD trigger line flashed a fresh sell signal. The +DI and -DI lines on the 14day Directional Movement Index (DMI) trend indicator registered bearish expansion, with a rising

ADX line suggesting an early stage of a bear trend.

Conclusion

Technically, while stocks should bounce back with the index grossly oversold after falling to three-month lows necessitating an oversold rebound, bearish trend indicators, weak buying momentum and market breadth suggest that recovery sustainability will remain in doubt. Worries over soaring inflation, rising interest rates and possible recession still point to potential further downward correction ahead, while geopolitical tensions would likely keep investors’ risk sentiment in check.

On the index, initial support will be from the recent pivot low of 1,538, with 1,520 and the 1,500 psychological level to act as stronger supports. Crucial chart supports are at 1,470 and 1,452, the 50 per cent Fibonacci Retracement (FR) of the 1,207 low of March 2020 to the December 2020 peak of 1,695, which matched the November 2020 low. Immediate resistance is retained at 1,580, with 1,600, 1,620 and 1,640 as stronger upside hurdles.

On stock picks, key telcos and utility heavyweights, which suffered heavy losses recently like Axiata, DiGi.com, Maxis, TM and Tenaga, should be able to attract renewed bargain-hunting interest at current depressed levels for recovery upside, while O&G-related counters such as Bumi Armada, Dialog Group, Hibiscus Petroleum and Velesto Energy should also attract buyers for rebound upside.

The economic recovery should translate into better corporate earnings and interest in local equities as most blue chips are trading at attractive valuations...

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