FBM KLCI likely to remain overbought

Stock-wise, investors should continue to buy Genting but look to sell on rally Maybank, Public Bank and Sime Darby as stronger profit-taking and selling interest could emerge, says a research head

SHARE prices on Bursa Malaysia extended gains for a second week with the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) surging to a 16-month high, again lifted by stronger-than-expected economic data signalling recovery, and as the US Dow Jones Industrial Average broke through the 10,000 mark.

For the week, the FBM KLCI climbed another 22.95 points, or 1.86 per cent, to close at 1,256.77, with gains in Maybank (+21sen), Tenaga (+26 sen), IOI Corp (+16 sen), Sime Darby (+15 sen) and Public Bank (+18 sen) representing more than half of the index's rise. Average daily traded volume and value increased to 1.069 billion shares worth RM1.235 billion respectively, compared with 721.9 million shares worth RM1.18 billion in the previous week. The average daily volume was the highest seen in 11 weeks.

As expected, the FBM KLCI tested new highs last week, driven by optimism reflected in external markets, especially the US, which had a good start for the week on better-than-expected earnings from JPMorgan and Intel, and smaller-than-expected fall in retail sales. While the US market retreated from its yearly high to end the week on a softer note due to weaker-than-expected financial performance from Goldman Sachs and General Electric, the FBM KLCI rebounded to close the week on a high note.

This is an important week as apart from the release of usual economic data like the Consumer Price Index and foreign reserves on Wednesday and Thursday respectively, we will be witnessing the tabling of Budget 2010 on Friday. As it is not a secret that the government is trying to keep a tight rein on the budget deficit, the market is not having any high hopes.

The total allocation for Budget 2010 is expected to be around RM177.3 billion, 14.7 per cent lower than this year's RM207.9 billion, and the forecast deficit of 4.7 per cent is much lower than this year's expected 7.4 per cent. The deficit budget will be targeted at strengthening domestic demand, developing quality human capital and ensuring the wellbeing of Malaysians. It may also provide a glimpse into the new economic model, which will be divulged in full detail when the 10th Malaysia Plan is disclosed in June next year, that will focus on the services sector as the country strives to reduce its over-reliance on the competitive manufacturing sector, especially the electric and electronic sub-sector.

Do not expect any broad-based windfalls or reduction in direct taxes as the incentives given are likely to focus on the hardcore poor and low-income earners. While most of the measures announced last year such as enhancements of social safety net, higher minimum pensions, greater monthly allowance for disabled people, free electricity for those whose monthly bills are below RM20 and one month's bonus for civil servants are likely to be maintained, additional direct incentives for hardcore poor like food coupons for necessity goods and higher tax rebates could be given. "Sin" sectors could be facing the music as the government tries to increase its revenue base while construction, consumer and property stocks could be benefiting from government incentives.

Although the FBM KLCI is in an overbought condition, expect the current positive market undertone to keep any profit-taking corrections shallow and short, while the index extends its base-building mode to test the 1,370 target in 2010, most probably in the first half of the year. So keep your options open, and look to accumulate blue chips and fundamentally sound small and mid-cap stocks that normally have greater earnings growth potential during a recovery phase. The domestic market could receive a shot in the arm from the US markets this week if most of the housing data (starts, permits, existing sales and house price) that will be released this week exceed expectations.

Technical outlook

The domestic stock market stayed in consolidation mode for the first two days last week, with blue chips stuck in rangebound trade due to weak institutional participation, but lower liners saw some rotational interest on selected construction stocks. The market staged a breakout mid-week encouraged by a regional rally after China's exports declined at the slowest pace year-to-date and Australia consumer sentiment jumped.

Nonetheless, profit-taking on strong gainers and cool buying interest given the absence of strong follow-through buying caused stocks to dip the next day, but buyers returned on Friday after overnight US stocks sustained rally with the Dow Jones average breaking past the 10,000 mark on earnings optimism and after crude oil prices surge towards US$78 a barrel, the highest in a year.

The FBM KLCI rose from intra-week low of 1,231.26 early Tuesday and traded up to close at a 16-month high of 1,256.77 on Friday for a smaller 25.41-point trading range last week, against the e 33.62-point trading range in the previous week.

The daily slow stochastics indicator for the FBM KLCI has returned to the overbought zone after triggering a buy signal the previous week, but the weekly indicator maintained its bearish divergence signal at the highly overbought zone. The 14-day Relative Strength Index (RSI) re-hooked upwards for a higher reading of 78, and similarly for the 14-week RSI which has a higher overbought reading of 76.74.

Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator maintain its bullish stance following the previous week's buy signal, while the weekly MACD signal line re-hooked upwards. The ADX line on the 14-day Directional Movement Index (DMI) trend indicator has appreciated further for a reading at 46.3, signalling stronger uptrend, reinforced by expanding +DI and -DI lines.

Conclusion

While daily and weekly momentum indicators for the FBM KLCI registered more overbought readings following a breakout rally in the past two weeks, they may continue to stay overbought for a prolonged period, especially if buying momentum stays strong. Hence, profit-taking pullbacks can be expected, but should be shallow if buying momentum stays robust on positive market breadth. Meantime, trend indicators remain bullish and signal continuation of uptrend.

Stock-wise, investors should continue to buy Genting Bhd as last Friday's breakout to close above RM7.40 should see prices rising towards higher targets of RM7.80 and RM8.20 in the immediate term. However, look to sell on rally Maybank, Public Bank and Sime Darby as stronger profit-taking and selling interest could emerge at higher levels as overbought conditions increase. Lower liners should see increased retail participation especially if daily traded volume sustains above the 1-billion-share mark, with focus on key construction and oil & gas stocks likely given the high crude oil prices.

As for the FBM KLCI's upside potential, the next significant resistance is at 1,271, an important pivot low on May 5 2008, and then 1,305, the April 29 pivot high. Looking ahead, more bullish momentum will be needed for a sustained breakout above this level before meeting the next significant hurdle at 1,340, a previous key chart support level in 2007. On the flipside, immediate support is adjusted upwards to 1,248, with 1,235 and then 1,228 acting as stronger retracement supports to cushion downside during profit-taking corrections.