Indicators signal further consolidation for KL bourse

Share prices on Bursa Malaysia remained largely in consolidation mode last week, following a rebound from the sell-off triggered by the debt default scare in a key Dubai state-owned entity, after its government requested a six-month "standstill" on almost US$60 billion (US$1 = RM3.38) of borrowings.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased 0.41 point last week to end at 1,270.2, with gains in Genting Bhd (+25 sen), AMMB (+13 sen) and KLK (+40 sen) offset by losses in Axiata(-3 sen), PLUS (-9 sen), YTL Corp (-18 sen) and Astro (-19 sen). Daily average volume and value rose to 814.3 million shares worth RM1.13 billion from 771.5 million shares and RM1.02 billion in the previous week.

Better-than-expected October exports for Malaysia and lower US non-farm payroll losses in November came as pleasant surprises last Friday. These are some positive developments that could exert some upward pressure for a year-end rally after the third quater earnings results of local listed players surprised on the upside. Malaysia's exports grew 1.6 per cent year-on-year or 15 per cent month-on-month in October, led mainly by higher external demand for electrical and electronic (E&E) products, crude petroleum and liquefied natural gas. It was the first expansion after 12 consecutive months of declines. It is noteworthy that exports to China alone surged due to E&E products. Obvious listed beneficiaries from this improving trend are companies like Unisem (Buy, Target Price RM2.50) and MPI (Buy, Target Price RM6.80).

The main implication from the trade numbers are that they solidify consensus view of a positive economic growth in the final quarter, possibly around 2.2 per cent, after three quarters of contractions. Sustainable growth on the back of continued government pump priming will definitely lead to better economic growth in 2010 than the official forecasts of 2 to 3 per cent.

While the above factors are keeping alive hopes for a year-end rally, any upside is expected to be minimal on the back of thin volume. As most momentum and technical indicators are pointing towards a further correction, it would be worthwhile to look for buying opportunities to ride on a potential rally next year. From a bottom-up perspective, the 2010 target for the FBM KLCI has been raised to 1,390 from 1,370 as target prices for some benchmark linked-counters have been raised after the better-than-expected third quarter earnings results.

As the index target implies only a 9.4 per cent upside from the current level, stock selection is crucial. Under such circumstances, a bottom-up approach would be more appropriate than top-down selection as some stocks in the same sector are trading at expensive valuations. Investors should scout for buying opportunities in undervalued high beta and defensive stocks in the banking, plantation, gaming, oil & gas, technology and industrial sectors. Some top picks are Genting, KLK, Public Bank, KNM, RHB Capital, Unisem and Supermax.

KNM is a "contrarion" call as this column believes much of the negativity surrounding the stock has been priced in and it has the capability and capacity to seize any prospects of a demand a recovery real fast. Global oil majors have been dragging their feet on major capex for the last 18 months and they can't afford to do that forever. The resumption of the Gorgon project in Australia and an award of a related project to Wah Seong recently is a tell-tale sign that investments in the industry could resume soon as the global economy recovers.

Besides, Malaysia's reliance on the petrodollar as its main source of revenue implies the need to continue pouring money into exploration, development and production activities. In the near term, Petronas is expected to award a RM3 billion transport and installation contract latest by the end of the first quarter of 2010 that will benefit industry players.

On a separate note, as valuations are stretched in blue chips like Sime Darby, IOI Corporation, Maybank and MISC, advise investors to sell these stocks and rebalance their portfolio.

Technical outlook

The local stock market tumbled last Monday, in sympathy with sharp regional losses, on concern over the potential negative repercussion from a possible debt default by Dubai state-owned enterprises. However, the market recovered in line with the strong rebound in the region in the next two days, after Chinese manufacturing grew at its fastest pace in five years to offset fears over Dubai's debt woes and encouraged market players to return and nibble on lower liners. The subsequent weak buying momentum forced stocks into low-volume consolidation for the remainder of the week, with most investors away for the year-end holidays.

The FBM KLCI rose from a four-week low of 1,248.58 early last Monday to a high of 1,273.46 early Thursday, expanding to a 24.88-point trading range last week, compared with the narrow 5.95-point trading range the previous week.

A buy signal was triggered by the daily slow stochastics for the FBM KLCI following last week's rebound from last Monday's fall, implying good upside potential this week, but the weekly indicator has dipped below 80 to signal further correction ahead. The 14-day Relative Strength Index (RSI) indicator declined to a reading of 56.13, but the 14-week RSI stayed overbought with a slightly lower reading of 72.57.

The daily Moving Average Convergence Divergence (MACD) has neutralised most of its bearish momentum, but the weekly MACD trigger line extended lower following last week's sell signal. Meanwhile, the ADX line on the 14-day Directional Movement Index (DMI) trend indicator has softened to a non-trending reading at 22.16 as of last Friday, with the +DI and -DI lines levelling to signal a trendless market.

Conclusion

Except for the daily slow stochastics buy signal, other technical momentum and trend indicators for the FBM KLCI deteriorated further to suggest an extended consolidation phase. The weakening buying momentum and slower trading pace also point to consolidation and more rangebound or sideways trading as investors continue to stay away due to the year-end holidays.

Immediate support for the index remains at 1,267, the 38.2 per cent Fibonacci Retracement (FR) of the rally from the 1,233 pivot low of November 2 to the November 17 pivot high of 1,288. Stronger retracement supports are available at 1,260 and 1,254, the respective 50 per cent FR and 61.8 per cent FR levels, while last week's low of 1,248 will be an important pivot support. On the flipside, immediate resistance is at 1,275, the 23.6 per cent FR, with 1,280 and 1,288 as stronger resistance levels.

Chart wise, remain cautious on core banking stocks AMMB, CIMB, Maybank and Public Bank at current levels, unless sharp falls register which will be attractive to bargain hunt for further upside next year. Continue to nibble gaming stock Genting Bhd to position for medium-term gains as sentiment should improve toward the opening of Resorts World Singapore by the first quarter of next year.

As for lower liners, any dips in construction related stocks such as MRCB, Tebrau, UEM Land and Zelan will be ideal to bargain for rebound gains, as technical conditions become oversold.