Bursa Malaysia blue chips rose a fourth week, but trading momentum slowed and gains were tempered by profit-taking ahead of the Hari Raya Aidilfitri holiday. There was renewed concern over the health of European banks and increased uncertainty over the European sovereign debt crisis even as US markets bounced back on better-than-expected economic data.
Average daily trading volume slumped to 610.6 million shares with average value at RM1.12 billion, compared with 928.9 million shares worth RM1.86 billion on average the previous week.
Rating cuts on 10 Selangor water-related bonds totalling RM7 billion, with some falling as much as three notches, by Malaysian Rating Corp had little impact on the market last week. However, affirmation of more such relegations in the months ahead will affect these bondholders, especially the banks, due to the associated provisions.
Bursa Malaysia is expected to extend its consolidation phase this week after the festive celebration.
The government's acknowledgement last Saturday to review the tax base to help reduce the budget deficit is positive in improving Malaysia's sovereign rating, but it is a long shot and may take a few years before implementation.
The Prime Minister's statement in a related interview with CNBC Asia that the country may consider allowing the ringgit to trade offshore if it will help the economy can be an immediate-term catalyst for the ringgit and the benchmark index to strengthen further, if executed.
In the absence of any release of domestic economic data or major news locally, market direction in this shortened trading week will depend on external news.
On the US front, retail sales, industrial production, initial jobless claims and the Consumer Purchasing Index (CPI) data will be closely watched this week.
For now, there is no immediate sign of any whirlpool on the global front, after worries about European banking woes were snubbed by US President Barak Obama's new proposals to bolster the still fragile US economic recovery and a successful Portuguese debt auction last week.
Even the European markets closed firmer last week after a n even bigger-than-expected drop in the US initial jobless claims eased concern that employers will accelerate firings as the economy cools.
China's better-than-expected industrial output, up 13.9 per cent year on year in August, adds credibility to an "all very well" scenario although a 3.5 per cent surge in the CPI implies greater prospects of further monetary tightening.
Back on the home front, it is definitely not blue skies ahead based on developments in the currency market. The euro dropped the most in a month against the dollar last week following worries about a worsening sovereign debt crisis in the region.
If there is any relapse this week and if it is prolonged, it could lead to a long waited correction.
So, ahead of a continued consolidation or even a possible correction in the broader index, market interest could switch to second and lower liners in another thin trading week.
Look to take profit in overvalued blue chips like IOI Corp and Sime Darby while picking up undervalued counters like Boustead and Supermax, which was overly bashed recently.
Technical outlook
Spot month September FBM KLCI futures contract traded on Bursa Malaysia Derivatives advanced 5.5 points, or 0.38 per cent, last week to 1,438, improving to nearly on par with the cash index, against the 3.17-point discount the previous Friday, lifted by mild bargain hunting interest ahead of the long Aidilfitri break.
While regional markets rally on Monday on better-than-expected US jobs data, which boosted the outlook for world economic recovery, local stocks saw profit-taking capping upside after recent strong gains.
The FBM KLCI lost one point to settle at 1,434.68, off an early high of 1,440.
The local market extended profit-taking consolidation the next day amid mixed regional markets, with most players sidelined ahead of the festive break.
The index eased 0.4 point to close at 1,434.27 on slower trade and negative breadth.
Bursa Malaysia shares extended losses for the fourth consecutive day on Wednesday, in line with decline in regional markets, as market sentiment soured over the world economy after renewed concern about the health of European banks.
The benchmark eased 0.13 point to close at 1,434.14, bouncing off a low of 1,428.66 by late trading.
Sentiment perked up before the long weekend break, boosted by regional rebound as European debt concern eased and investors bargained lower liners.
The index closed up 3.64 points at 1,437.78 as gainers beat losers by 402 to 162 on a relatively active half-day trading session of 449.6 million shares worth RM861million.
Trading range last week shrank to 11.35 points, compared with 28.82 points the previous week.
The FBM-EMAS Index added 12.25 points, or 0.13 per cent, week on week to 9,597.04, while the FBM-Small Cap Index climbed another 57.18 points, or 0.5 per cent, to 11,293.91, as small cap stocks recovered further, supported by mild bargain hunting interest.
The daily slow stochastics indicator for the KLCI stayed level at the extremely overbought region (Chart 1), while the weekly stochastics climbed deeper into overbought territory.
The 14-day Relative Strength Index (RSI) indicator also levelled and remained mildly overbought with a reading of 78.46, while the 14-week RSI inched upwards to a reading of 76.42.
In the meantime, the daily Moving Average Convergence Divergence (MACD) trigger line has weakened to indicate less upward momentum, but the weekly MACD extended its bullish signal for a sixth week.
The +DI and -DI lines on the 14-day Directional Movement Index (DMI) indicator expanded again on a steadily ascending ADX line.
Conclusion
As the FBM KLCI momentum indicators remain overbought after the four-week rally, blue chips are likely to consolidate with limited upside bias, but lower liners and small cap stocks should see increased participation by momentum players returning from the long festive break.
On the external front, fewer worries about a possible double-dip recession in the US, after better-than-expected economic data from jobless claims to improved sentiment over the health of European banks, should boost domestic sentiment.
In any case, investors at home should watch out for FBM KLCI resistance from the December 2007 peak near 1,450 to initially restrict upside, with the next significant hurdle expected from the January 4 2008 peak of 1,468.
A more formidable resistance is seen at 1,490, representing the January 8 2008 peak, with profit-taking interest likely to be very strong.
Immediate FBM KLCI support is at 1,425, then 1,410, with subsequent support at 1,392 and 1,380.
Chart-wise, look to sell rally on Malayan Banking, RHB Capital and Tenaga Nasional as overbought technical conditions persist, but upgrade to buy rubber glove makers Adventa, Latexx and Supermax, which are long overdue for technical rebound given the aggravated oversold condition.
Maintain sell rally Malaysian Resources Corp and UEM Land to lock in profits after recent strong gains.
On the lower liners, bargains can be had with Malton, Sarawak Cable, Time dotCom, Zelan, MyEG Services, Notion VTech and Unisem for trading profits as rotational plays return.
The subject above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
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