KL bourse's upside momentum likely to continue

The return of investors from the two-week school holidays is expected to boost daily volumes above the two-billion-share mark

THE Kuala Lumpur Composite Index (KLCI) appreciated 14.65 points, or 1.4 per cent last week to settle at 1,090.15, comfortably above the 38.2 per cent Fibonacci Retracement (FR) of 1,078. Gains in major banking stocks Maybank (+4.51 points), Public Bank (+1.35), BCHB (+1.3), RHB Capital (+1.02) and EON Capital (+1.01) contributed to 63 per cent of the index’s rise.

Average daily trading volume and value improved further to two billion shares worth RM1.72 billion respectively, compared with the 1.78 billion shares and RM1.59 billion average in the previous week.

The benchmark index’s continuous climb towards the psychological hurdle of 1,100 points was driven by external factors with the market reacting favourably to improving economic indicators from China and signs of stabilising US banking sector with 10 banks pledging to return the US$68 billion (US$1 = RM3.51) in government bailout money.

The high risk premium attached to the equity market is seeing some erosion as investors turn more optimistic that the worst of a global recession is behind them and an economic recovery is within sight by year-end.

The banking sector, being the main proxy to an economic recovery story, is riding high on the optimism and abundant liquidity. Firmer crude oil prices, which climbed above the US$73 a barrel level last week on news that the International Energy Agency had raised its consumption forecast by 120,000 barrels per day for 2009, helped oil and gas-related stocks outperform the broader market as well which had some minor spill over effect on plantation counters like Sime Darby and IOI Corp.

Despite the run-up, at an average calendar year 2010 price-to-earnings ratio (PER) of 10x, the upstream oil and gas players are still trading at a considerable discount to market PER of the KLCI’s of 13x that warrants further appreciation in their share prices.

Murphy Oil Corp’s announcement last Friday that it has made two additional discoveries in offshore Malaysia, one of them near its Kikeh field offshore Sabah and another at the East Patricia prospect in Block SK 309, offshore Sarawak, could sustain interest in the sector.

Friendly chats with some chief execs of listed companies during last week’s oil and gas conference in KL revealed that business is strong as usual and orders are expected to pick up in the second half as crude oil prices hover between US$70 and US$80.

Anticipation is building up for announcement of more market-friendly measures and economic liberalisation efforts during Invest Malaysia 2009 later this month. The construction and the building material sectors are well poised to benefit from any positive news flows and are expected to attract some buying interest this week.

As steel companies are expected to run down their expensive stockpile in this quarter with pickup in production, inventory buildup will gain traction in the third quarter. Lower iron-ore prices in the third quarter vis-à-vis substantial inventory write-down in the preceding three quarters will translate into better operating margin and profitability will improve as steel prices begin to rise.

It would be worthwhile to pick up some niche property players that have good landbanks and recurrent earnings prospects as well as property launches are gaining momentum since this quarter to capitalize on the wealth effect created by a strong equity market, low interest rates and slated economic recovery.

The inflation number for May that will be released on Wednesday, forecast to be at 2.2 per cent against April’s 3 per cent, will be supportive of lower mortgage rates for rest of the year.

Technical outlook Bursa Malaysia shares closed last Monday on a mixed note as market players remained on the sidelines amid weaker regional markets. Stocks extended profit-taking consolidation the next day, with buying momentum focused only on selected third liners and penny stocks on a rotational basis.

The KLCI dipped to intra-week low of 1,066.99, but bounced back strongly on Wednesday to coat-tail regional rallies led by a 4 per cent surge in Hong Kong sparked by sharp gains in commodities and tame inflation in China.

The local stock market extended gains in the remaining two trading days for the week, with the KLCI charting a fresh nine-month high of 1,095.91, the highest since September 2 last year. Encouraged by improving economic indicators from China and the US, and surging crude oil prices above the US$70 a barrel level, oil & gas and construction stocks enjoyed strong rallies to outperform the broader market.

Week-on-week, the FBM-EMAS Index was up another 144.21 points, or 2 per cent to close at 7,357.75, while the FBM-Small Cap Index (SCI) was again much stronger with a rally of 687.05 points, or 7.4 per cent to 9,974.62.The daily slow stochastics indicator for the KLCI climbed higher into the very overbought zone for a reading above 90 (Chart 1), but the weekly indicator triggered a buy signal at the bullish extended region.

The 14-day Relative Strength Index (RSI) extended higher after crossing above the bearish divergence downtrend line the previous week, while the 14-week RSI climbed above the 70-point mark to register an initial overbought reading.

Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator crossed for a buy signal in mid-week, while the weekly MACD signal line expanded higher above its signal line to indicate strengthening uptrend.

On the 14-day Directional Movement Index (DMI) trend indicator, the ADX line climbed higher for a reading of 44.19 last Friday, implying a stronger up-trend on expanding +DI and –DI lines which signals a bullish trend.

Conclusion Strengthening trend indicators for the KLCI suggests that upside momentum should be sustained this week, with the return of investors from the two-week school holidays expected to boost daily volumes above the two-billion-share mark.

Nonetheless, investors should be aware of the increasingly short-term overbought momentum in rallying stocks which will encourage profit-taking and selling to cap upside potential. Sector-wise, maintain overweight on oil & gas-related stocks which are expected to sustain their strong run-ups with crude oil prices staying firm above the US$70 a barrel mark.

Meantime, rotational interest could switch to construction and property stocks, especially those involved in Iskandar Malaysia on hopes more projects will be announced soon after improving ties with our neighbour with interest to build a third bridge linking Singapore and east Johor.

As for the KLCI this week, a bullish breakout above the 1,100 psychological resistance will grease upside towards 1,120, with 1,138, the 2.236X extension of wave A, as next upside target. Looking ahead, the next higher target is at 1,163, which represents the 50 per cent FR of the selldown from the all-time high of 1,525 to the pivot low of 801.

On the flipside, immediate support is revised higher to 1,080, with 1,072 and 1,065 acting as stronger downside cushions