Further correction for Bursa on the cards

It is appropriate to maintain sell call on most blue chips and lower liners, says a research head

Despite the profit-taking correction on first-half window-dressing gains on the broader stock market last week, the Kuala Lumpur Composite Index (KLCI) on Bursa Malaysia managed to hold steady as blue chips stayed rangebound given optimism over the bold long-term measures introduced by the prime minister in the Invest Malaysia conference to further liberalise the domestic market.

The KLCI was down only 3.08 points, or 0.3 per cent, last week to settle at 1,072.69, with strong gains in Sime Darby (+3.83 index points), BCHB (+2.61) and Public Bank (+1.12) offsetting losses in other blue chips.

Average daily trading volume and value slowed to 999.2 million shares worth RM1.08 billion respectively, compared with the 1.33 billion shares and RM1.39 billion average in the previous week.

The government's latest liberalisation measures - reducing the role of the Foreign Investment Committee, relaxing rules governing foreign investments, removing the 30 per cent Bumiputera equity requirement for firms seeking public listing and allowing 100 per cent ownership for qualified and leading fund management companies to establish operations in Malaysia in the wholesale segment - are positive in attracting foreign capital while increasing the level of competitiveness among Malaysians in a globalised world.

Nonetheless, the bold and forward-thinking ideas received muted response as market sentiment was hammered by higher-than-expected job losses in the US as fears of a prolonged global recession overwhelmed domestic catalysts.

It is a known fact that global economies went through the worst period of the slump so far in the last three quarters and are likely to remain in the doldrums for the next two quarters.

There could be more such countervailing news in the third quarter, a period known for softer market activities, as global economies adjust themselves in this transition period between slump and growth.

The positive side is that green shoots have appeared and are likely to sustain based on some important leading economic indicators. For instance, the US' leading economic indicator turned positive for two consecutive months and this was supported by housing starts and building permits which have reversed their downtrend and the Organisation for Economic Cooperation and Development leading index has shown signs of bottoming, which is consistent with the group's upward revision in gross domestic product growth forecast to 0.7 per cent for 2010 from 0.1 per cent previously.

Improvements on the external front will lead to resumption in Malaysia's export growth and locally the electrical and electronics companies are already talking about improved sales visibility and hiring in the second quarter.

So, last Friday's announcement of a 29.7 per cent year-on-year contraction in May 2009 exports could be a non-event. Domestic fiscal expansionary measures will provide added ammunition to contain the economic slump.

So, the second half of the year is expected to be mixed. Anticipate more corrections in the FBM KLCI, which will replace the KLCI index today by using last Friday's close as reference price, before the market recovers but view this consolidation period as an opportune time to selectively pick future winners to compensate for previous missed opportunities.As the broader index has surged vigorously in the past there and half months, a 7 to 10 per cent correction to the 960-1,000 point level would not be excessive to neutralise its overbought condition before an extension of this bear market rally towards 1,200 points by year-end.

Continue to overweight oil & gas, property, technology and gaming sectors and look to buy on dip opportunities in cyclical plays like construction that will benefit from the impending huge development expenditure.

Technical outlook

Last Monday, stocks stayed in a holding pattern despite weaker regional markets as investors speculated on the eve of the Invest Malaysia conference that market boosting measures will be announced by the prime minister, who is also finance minister.

The market traded within a tight range on a cautious tone which was sustained for the rest of the week.The KLCI was spared the volatility in external markets, as while lower liners staged profit-taking corrections, sharp gains in blue chips led by Sime Darby and BCHB cushioned the index's downside.

The KLCI was consequently trapped within a narrow trading range bordering a high of 1,083.25 on Thursday afternoon and low of 1,067.81 the next morning session.Lower liners remained under selling pressure to underperform blue chips given the weak buying momentum and keen profit-taking interest post first-half window dressing.

Week-on-week, the FBM-EMAS Index eased 3.45 points, or 0.05 per cent, to close at 7,208.01, but the FBM-Small Cap Index (SCI) tumbled 299.16 points, or 3.3 per cent to 8,875.66. Looking at momentum indicators for the KLCI, the daily slow stochastics has fallen below the overbought region to trigger sell signal following last week's downward consolidation (Chart 1), while the weekly indicator is hooking further down from the overbought region to maintain a bearish divergence signal.

The 14-day Relative Strength Index (RSI) indicator fell below the 60-point mark last Friday, while the 14-week RSI deteriorated mildly for a reading of 65.23 as of last Friday.The daily Moving Average Convergence Divergence (MACD) trend indicator has re-hooked downwards, while upside momentum is waning on the weekly MACD, pointing toward more consolidation ahead.

Meanwhile, the 14-day Directional Movement Index (DMI) trend indicator flashed a weaker reading to suggest weak upside momentum, with the ADX line continuing to register weakness, but the +DI and -DI lines retained their bullish stance.

Conclusion In addition to the daily and weekly slow stochastics momentum indicators for KLCI which are mildly overbought as of last Friday, weakening trend indicators are suggesting further downward correction ahead.

Nonetheless, the absence of strong selling momentum suggests that downside risk should be limited this week. However, it is appropriate to maintain sell call on most blue chips and lower liners, as the risk-to-reward ratio is still unfavourable at current elevated levels. For this week, look for selling opportunity on trading positions in lower liners, with immediate resistance seen at last week's high of 1,083, and more formidable upside hurdle at the 1,090 to 1,095 region. As for the downside, watch immediate support from 1,062, which represents the 50 per cent Fibonacci Retracement (FR) of the sell-off from 1,095 to 1,082, to hold base and prevent a more significant correction ahead. A breakdown will force a test of next support at 1,050, with the lower Bollinger band at 1,046 reinforcing a more solid support platform.