Bullish but profit-taking to cap gains on Bursa

Investors should maintain the view to 'sell on rally' for construction, property and steel related sectors, says a research head

Share prices on Bursa Malaysia staged a sharp profit-taking correction last week after the World Bank predicted a deeper recession this year, but buyers returned to the market to trigger a strong rebound by late week after the US Federal Reserve assured investors that the economic contraction is waning.

Subsequently, the Kuala Lumpur Composite Index (KLCI) recouped 16.27 points, or 1.5 per cent, last week to settle at 1,075.77, with gains in Genting (+3.03 points), IOI Corp (+2.02), Axiata (+1.69) and Tenaga (+1.58) contributing half of the index's rise for the week.

Average daily trading volume and value fell to 1.33 billion shares worth RM1.39 billion from 1.64 billion shares and RM1 billion in the previous week.Buying by local funds ahead of Invest Malaysia 2009 and attempts to window dress for the first half closing helped the KLCI to reverse the two-day losing streak for a 16.27-point gain last week.

The incentives or positive announcements that will be made during Invest Malaysia are likely to hold up the positive momentum well throughout the week until the implementation of the FTSE Bursa Malaysia KLCI next Monday.Subsequent to that, expect bouts of profit-taking to neutralise the current overbought conditions before some extended consolidations until we hear more positive news from the corporate earnings front in August.

Thus, it would be advisable to adopt a sell on strength mentality over the next two weeks to buy back equities after prices dip, potentially pushing the KLCI to the 980 to 1,000 level.

Genting Malaysia, YTL Power and Parkson, the three new inclusions in the FBM KLCI 30, have seen a good run in their share prices in the last two months and the upward momentum in the first two stocks appears intact despite the surge.

Apart from their defensive qualities and sustainable dividend payout, both are cash rich with some RM4.9 billion and RM5.6 billion respectively to invite speculations over merger and acquisition prospects.

Genting Malaysia appears fully valued. The influenza A (H1N1) outbreak and the impending opening of Marina Bay Sands and Resorts World at Sentosa, Singapore, in the next two and three quarters respectively, are the immediate term risks to the bottom line that could lead to a derating.

YTL Power will benefit from the consolidation of earnings from PowerSeraya, strengthening of the pound sterling against the ringgit and potential revision in water tariff rates for Wessex Water for the 2010-2015 period.

It has some upside based on a target price of RM2.30 and appears worthy of keeping with a dividend yield of above 5 per cent, but any further upside from current price levels is a good opportunity to take profit.

On a separate note, Puncak announced last Friday that it has received a fresh offer from the Selangor state government to take over PNSB (water treatment plant subsidiary) and Syabas for a total consideration of RM5.3 billion.

The key difference in the revised offer is Puncak has given the option to transfer water services-related debts (including bonds) to the state government. The offer is inclusive of the RM443 million receivables due from state government.

After netting the 30 per cent minority stake in Syabas, proceeds due to Puncak work out to RM2.73 per share, below market talk of between RM3.40 and RM4.00. The announcement did not address to whom the O&M licence will be awarded.

If the state government wants to consolidate O&M licences under KDEB or KPS, the offer prices are not attractive and Puncak is likely to hold out for a better offer. The current offer already imputes 1x book value valuations on the assets, which we believe is what the federal government is prepared to pay, if it steps in.

Thus, there is a downside risk to Puncak's share price.Technical outlookThe domestic stock market closed lower on Monday, depressed by sharp losses in lower liners led by construction and property stocks related to Iskandar Malaysia in Johor.

The KLCI tumbled from an opening high of 1,061.88 to a low of 1,040.4 that day. On the next day, while Asian markets dived after the World Bank forecast a deeper global recession this year, the KLCI staged a rebound from an early sharp dip to a fresh five-week low of 1,028.14 prior to closing at the day's high of 1,044.48 to form a bullish "hammer" reversal candle.

The market subsequently sustained strong gains in the next three days for a V-shaped technical rebound to peak at a high of 1,081.83 early Friday, before profit-taking and selling activities ahead of the weekend caused stocks to close off best.

The sharp correction in lower liners, especially in construction and property stocks related to Iskandar Malaysia, found bargain hunters which eventually lifted prices significantly off lows in a strong three-day technical rebound.

The daily slow stochastics indicator for KLCI has returned to the overbought region following last week's strong technical rebound (Chart 1), while the weekly indicator continued hooking down to maintain a bearish divergence signal.

However, the 14-day Relative Strength Index (RSI) indicator has recuperated, going above the 60-point mark, together with the 14-week RSI which re-hooked upwards for a reading of 65.97 as of last Friday.

Meanwhile, the daily Moving Average Convergence Divergence (MACD) trend indicator also rehooked upwards to indicate a lessening bearish trend, but the weekly MACD continue to level off, suggesting further gains will be essential to sustain any bullish trend ahead.

On the 14-day Directional Movement Index (DMI) trend indicator, the ADX line continued to deteriorate to a reading of 29.05 last Friday, but the +DI and -DI lines has a bullish crossover to reverse early last week's sell signal.

ConclusionSave for the daily and weekly slow stochastics momentum indicators for KLCI which are overbought as of last Friday, most other indicators have returned to bullish mode.

Nonetheless, given the weaker buying momentum last week, investors should stay cautious as further strong gains this week will likely attract strong profit-taking and selling interest to limit upside potential.

Moreover, the major resistance of the 200-week SMA, which is currently at 1,095, should see strong stale bull selling interest which will need robust buying momentum to overcome. As such, maintain the view to "sell on rally" lower liners, especially the construction, property and steel related sectors as they have enjoyed strong gains to re-visit recent highs.

However, maintain a bullish view on oil & gas-related stocks such as SapuraCrest, Perisai Petroleum and Scomi Group, given the firm crude oil prices due to high possibility for rising inflation to lift commodity prices higher going forward.

For this week, a further rally towards the formidable 1,095 resistance will be a very good opportunity to SELL trading positions and benefit from the expected first half window-dressing gains, as profit-taking correction is imminent once the window-dressing is over.

On the downside, look for immediate support at 1,062, which represents the 50 per cent Fibonacci Retracement (FR) of the sell-off from 1,095 to 1,082 last week, with the 30-day SMA at 1,059 and the rising lower Bollinger band at 1,042 acting as stronger downside cushions.