Buying momentum key to KL bourse's upside

Published: 2009/09/07

Stocks-wise, investors should continue to buy gaming stock Genting while accumulating blue chips like Tanjong, AMMB and EON Capital, says a research head

THE local stock market managed cautious recovery from a sell-off sparked by regional weakness led by the heavy correction in China, as the rebound on Wall Street from a four-day correction amidst better-than-expected economic numbers signalling further recovery from recession lifted the market to end last week on a firmer note.

Consequently, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to add 4.47 points, or 0.4 per cent last week to settle at 1,178.74.

The strong rebound on BCHB (+3.21 points to the FBM KLCI), and Genting Bhd (+2.48) countered the loss on Axiata (-1.05) to sustain the benchmark's gain. Average daily traded volume and value shrank further to 553.9 million shares and RM983.1 million respectively, compared with the 651.7million shares and RM1.07 billion average the previous week.

The surge in Genting's (Buy, Target Price RM8.05) share price last week was driven by a rise in Genting Singapore's share price to a 52-week high of S$1.14 on rumours that its casino operation may start earlier than expected, probably on December 8 this year compared to early 2010. Genting holds 54 per cent of the subsidiary in the tiny island republic.



There was also some interest in Sime Darby (Sell, Target Price: RM8.86) last week on rumours that it is going to sell 10 per cent of its stake to parties related to the Chinese government which was denied by the second finance minister and management. Notwithstanding the objections, such a move will be short-term negative due to earnings dilution but will be long-term positive to Sime due to its reliance on the Chinese market currently and the immense growth opportunity the world's most populated nation provides in the distant future.

Sime currently exports about 8 per cent to 9 per cent of CPO production to China and there is definitely more to gain if it can add value by moving downstream.

With the entry of a government linked company, probably it would be easier for Sime to invest part of the RM5 billion that could it raise from the exercise. Management has indicated previously that it wants to invest RM3 billion in China where RM2 billion will go into non-plantation investment like coal ports and increasing processing capacity of its water concessions from current 80,000 cubic metres to 200,000 cubic metres, and the balance RM1 billion into plantation-related investments like refineries. It has only a CPO bunkering facility now in China.

The local market may take the lead from Wall Street's last Friday's performance that saw the Dow climb 96.7 points to 9,441.3 on narrowing contraction in payroll numbers.

Technical Outlook

New spot month September KLCI futures contract traded on Bursa Malaysia Derivatives was up 4.5 points or 0.4 per cent week-on-week to end at 1,182, reverting to a 3.3-point premium to the cash index, compared to the 5.3-point discount the previous Friday.

Stocks survived a selldown on Tuesday after the local market reopened following the three-day Merdeka weekend break, despite spillover weakness from external markets highlighted by sharp corrections in China and the US on concern equity prices have run ahead of current fundamentals. The FBM KLCI managed to bounce back from early low of 1,163.78 to close just 3 points lower at 1,171.28 on very cautious trade.

The market stayed in tight trading ranges the next day on further regional weakness, with the index mostly stuck between 1,164 and 1,168, but then managed a cautious recovery on Thursday, encouraged by the sharp near 5 per cent rebound in China on talk the government may implement steps to lift their stock market from the recent steep correction.

The overnight rebound on US stocks from a four-day losing streak due to better-than-expected retail sales managed to lift the local market to close firmer ahead of the weekend.

The KLCI recovered from intra-week low of 1,163.57 early Wednesday to late Friday's peak of 1,182.5 for a slightly better 18.93-point trading range for last week. Week-on-week, the FBM-EMAS Index rose another 24.18 points, or 0.3 per cent to close at 7,948.23, while the FBM-Small Cap Index (SCI) rebounded 49.22 points, or 0.5 per cent to 9,861.42.

A hook-up buy signal was flashed on the daily slow stochastics indicator for the KLCI (Chart 1), implying near-term upside potential, but the weekly indicator retained its bearish signal with a hook down from the overbought region for the third week.

The 14-day Relative Strength Index (RSI) indicator flashed a hook-up with a reading above 60 given the late week strength, while the 14-week RSI re-hook upwards into overbought territory with a reading of 71.54.

Meanwhile, the daily Moving Average Convergence Divergence (MACD) trend indicator maintained its downtrend signal, but the descent appears to be levelling off, while the weekly MACD indicator continued to level against its signal line. Conversely, the ADX line on the 14-day Directional Movement Index (DMI) trend indicator eased lower for a reading of 31.26, while the +DI and -DI lines expanded outwards, signalling a sustained uptrend.

Conclusion

Positive short-term technical momentum on the FBM KLCI, as highlighted by hook-ups on the daily slow stochastics and 14-week RSI indicators, imply good upside potential for this week. The only missing link will be buying momentum which must increase significantly to attract more investor participation and sustain resumption of uptrend. The strong overnight rally on Wall Street last Friday triggered by the slightly lower-than-expected job losses should hopefully spill over to the region and locally to promote further gains this week.

Stocks-wise, investors should continue to buy gaming stock Genting Bhd on spillover effect from Genting Singapore due to potential earlier opening of the Resorts World casino in Singapore, while accumulating blue chips like Tanjong, AMMB and EON Capital and continue to remain overweight on oil and gas, gaming, property, Iinfrastructure and technology sectors for medium-term upside given the more positive economic growth outlook. Lower liners in the construction and oil and gas sectors such as MRCB, Tebrau, Zelan, Dialog and Kencana are also likely to recover following recent consolidation, while momentum stocks like LCL Corp, Leader and MPHB should attract follow-through buying as trading momentum improves.

Recurring interest could be seen in the oil and gas stocks like Dayang Eneterprise as well as it rose suddenly by 25 sen to RM1.42 last Friday, which could be seen as a prelude to some interesting corporate development. The company has been on the lookout for viable acquisitions for some time and had denied previously about acquiring the Brooke Dockyard from the Sarawak state government. Considering that it has a huge cash balance of RM86 million and zero borrowing (after excluding the finance lease liability of RM0.1 million), something could be brewing. On valuation perspective, it is trading at a CY10 PER of 8.2x, lower than the sector's 9.5x and any earnings accretive deals could bump up the share price further although the thin liquidity is a concern.

The immediate hurdle this week for KLCI is at the 1,190/1,196 region, while the 1,200 psychological resistance will need decisive breakout backed by strong buying momentum to sustain towards 1,220. The 61.8 per cent retracement of the tumble from 1,525 all-time high to 801 low at 1,248, which also represent our best case upside target, should prove to be a formidable ceiling. Immediate support, meanwhile, is retained at 1,164, with stronger supports at 1,156 and 1,140 to provide stronger downside cushion.

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