Profit-taking likely to continue this week

Published: 2009/09/28

Investors should look for buying opportunities on dips in blue chips Axiata, Genting Bhd, Maybank and Public Bank for longer term gains, says a research head

Lack of investor participation (most market players were absent given the extended Hari Raya Puasa and school holidays) and weaker regional markets due to over-valuation concerns forced the local stock market into extended profit-taking consolidation last week.

The blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased 3.81 points, or 0.3 per cent week-on-week to close at 1,217.39. Gains in MISC (+0.94 points to the FBM KLCI), IOI Corp (+0.62) and KLK (+0.28) cushioned the downside to the index due to profit-taking losses in core banking stocks CIMB (-1.89), AMMB (-0.97) and Axiata (-0.84). Average daily traded volume and value dipped to 705.9 million shares worth RM1.04 billion, compared with 717.1 million shares worth RM1.15 billion in the previous week.

The benchmark index's sudden spurt to year's new high last Wednesday was short-lived as the follow-through buying momentum was weak due to the short trading week. Investor participation was not lively, especially from the institutional funds, as many fund managers were away for the Hari Raya holidays.

Activities are expected to return to normal this week but the downward pressure seen last week could prevail amid the highly overbought condition and generally weak market sentiment globally. A short correction is necessary to attract buyers as the market sorely lacks domestic catalysts to test the 1,248 technical resistance.

Expect more details on the recently announced multi-billion-ringgit government projects as we roll into October and Budget 2010 day draws closer. While more winds on news related to development of government land by the Employees Provident Fund could excite the market, do not discount the possibilities of multi-billion-ringgit development projects through other private financing initiatives to drive economic growth as the government tries to rein in spending.

This column believes that the recent run-up in some speculative counters could have entailed such prospects. As letting the ringgit appreciate against the US dollar can be another strategy to minimise budget deficit, such anticipation could lead to interest in highly geared companies that are saddled with dollar-denominated debts.

Some economic data for August that were released in the US last week raised more concern on the pace of recovery as new home sales rose less than expected, existing home sales contracted and durable goods orders fell. Only the Reuters/University of Michigan final index of consumer sentiment came higher than the preliminary reading at 73.5 in September. Worries are mounting that home sales number will take a beating when the US$8,000 tax credit for first- time buyers expires this end-November and the decline in durable goods order stoked concern that companies could curb spending amid excess capacity that will affect the job market.

The ISM manufacturing and non-farm payroll numbers for September that will be released this week respectively will shed more light on current economic conditions in the US. Consensus expectations are pointing towards improvement in both figures.

Meanwhile, do not expect the conclusion of the Group of 20 leaders meeting in Pittsburgh to have any impact on global equity markets this week as the resolution to cap bankers pay and bonuses are within expectation and the aim to reduce global capital imbalances to prevent future financial crisis is a long shot that cannot be achieved easily due to vested interest of various parties.

Technical outlook

Bursa Malaysia shares began trading last Wednesday on a high note, but failed to sustain gains due to the weak performance of regional markets and as most investors extended their Hari Raya Puasa holidays. The profit-taking consolidation extended into the next two trading days owing to the weaker US stock market after the Federal Reserve left interest rates unchanged and signalled it may claw back stimulus measures and existing home sales slumped unexpectedly. Regional markets were also weak.

The KLCI surged to a fresh 15-month high of 1,231.49 early Wednesday, the highest level charted since June 17 last year, before slipping on profit-taking to low of 1,213.88 on cautious Friday trade for a 17.61-point trading range for the week.

A sell signal was triggered last week in the overbought zone on the daily slow stochastics indicator for KLCI (Chart 1), while the weekly indicator showed weaker upside momentum at the overbought region. The 14-day Relative Strength Index (RSI) indicator flashed a bearish divergence signal against the higher level for the index, with a similar reading noted on the 14-week RSI.

The daily Moving Average Convergence Divergence (MACD) trend indicator has hooked down with likelihood to signal bearish divergence on further weakness, while the weekly MACD signal line is leveling again. Meanwhile, the ADX line on the 14-day Directional Movement Index (DMI) trend indicator appreciated further to a reading of 44.69 as of last Friday, but the +DI and -DI lines shrank to suggest weakening up-trend.

Conclusion

Unfortunately, bearish leads from profit-taking corrections on global markets, weak follow-through buying interest from local investors and bearish divergence signals on technical momentum and trend indicators for KLCI last week point to an extension of profit-taking this week. As such, investors who are awaiting a more significant profit-taking retracement should get ready to re-enter the market, as the persistent overbought momentum will be fully neutralised eventually.

Stock wise, technical charts are indicating that investors should look for buying opportunities on dips in blue chips Axiata, Genting Bhd, Maybank and Public Bank for longer term gains, and also lower liner steel and construction related counters such as Sino Hua-An, Kinsteel, MRCB and UEM Land given the spillover positive sentiment from the upcoming RM7 billion LRT extension project due to be finalised in coming weeks. On the other hand, revert to sell or take profits on oil & gas-related stocks Kencana Petroleum and Sapura Crest which had enjoyed strong gains recently, similarly for Kurnia Asia.

For the KLCI, profit-taking retracement is likely to be shallow, given its low beta or defensive nature compared to its global peers, with immediate support remaining at 1,210, and stronger supports at 1,200, and then 1,190. Immediate upside hurdle is now at last week's high of 1,231, with our immediate upside target still at 1,248, representing the 61.8 per cent retracement of the fall from 1,525 all-time high to 801 low.

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