Critical Juncture

Our local market is now at a critical juncture. We have not had a major correction since our significant 12% rally from the 1,060 level in mid-July. With the FBM-KLCI failing to break above the 1,200 psychological level and showing signs of exhaustion, concerns about the sustainability of the rally will has surfaced.

We are still bullish about the markets in the mid-term as well as in the long term. The money question is, will there be a major correciton in the short term? We believe the primary key to buoying our index to the next level would be CPO prices and the Property Index. The secondary keys would be the Shanghai Stock Exchange and the fear measuring VI Index.

POSITIVE : CPO Prices to push CPO stocks higher
The Malaysian Palm Oil Board (MPOB) recently reported i) weaker production numbers (m-o-m +3.02% vs. previous month’s +6.2%); ii) strong exports (+13.2% m-o-m) ; and iii) declining stock levels (-33% y-o-y). The stronger-demand and weaker-supply data will lend support to stronger CPO prices in the short term.

The positive CPO data has ignited a surge in interest in plantation stocks in the last few days with a spike in buying volume as well as in the Relative Strength Index (RSI) charts. If CPO prices can break above the 2,500 level, we will see stronger plantation stocks with a combined 22% weightage in the KLCI pushing the KLCI index past the 1,200 level in the next two weeks.

UNCERTAINTY : Property Stocks – new highs or major correction
With most of our technical property stocks picks rallying by over 40% in the last few weeks, property stocks have now come to a major crossroads. The Property Index now faces the prospect of making new highs or facing a significant correction in the next few days. The Property Index actually made a new high of 811.6 on Friday, but of which was only marginally higher than June’s 808.7. The index still failed to break the 810 resistance. We think that going forward, our local property stocks will be technically influenced by US property stocks.
The DJ Home Construction Index is now trading in an Uptrend Trading Box. With our KLCI strongly correlated (92%) with the US Dow Jones, it is no coincidence that the DJ Home Construction index is facing a similar predicament with our own property index – which is to break above a major trading resistance level (of the trading box) or face a major correction ahead.
From a historical basis, after touching the ceiling resistance of its trading box, the DJ Homes Construction Index may seem likely to swing lower to the support level of the box. However, there is a possibility that the index might also break above its trading box to signal a new phase of rally for US property stocks. The key to the direction of US property stocks would be possibly positive economic data on the US housing industry that will be pouring in over the next few days. On Monday, economists generally expects data on Building Permits to rise to 576k from the previous 570k and for Housing Starts to rise to 598k from the previous 582k. Economists are also expecting better Existing Home Sales data of 5.0m compared to the previous 4.89m. However, the key housing data would be the S&P Shiller Home Prices Index which will be released on the 25th of August. There is currently no consensus forecast on this data. We expect possibly positive property data in the US to push prospects marginally to positive territory and for US property stocks to provide some technical tailwind for our property index to break above the 810 resistance. While there are no property stocks in the FBM-KLCI index, we expect technically buoyant property stocks to act more as a confidence-booster to our local market, as opposed to an index booster.

Marginally Positive : Shanghai Stock Exchange to rebound?
The Shanghai Stock Exchange (SSE) is a source of minor worry as it has plunged 12% from a peak of 3,478 in the last few weeks. Of more concern is the SSE threatening to break below the 50-day MA line. Global equity markets are not affected yet by the SSE’s huge correction as the SSE has a history of highly insulated and eccentric volatility. Though the short term prospects of the SSE remains uncertain, we expect the combined leverage of the 50-day MA and the linear uptrend line to trigger a rebound in the SSE. In addition, the RSI of the SSE is now at oversold levels of below 30%, which lends credence to the possibility of a rebound in the next few days. An SSE rebound will ease concerns and add fuel to the global equities bull.

UNCERTAINTY : VIX Plateau/Consolidation
The fear yardstick otherwise known as the CBOE VIX Index is now plateuing after declining for the last 10 months. A declining VIX Index is a bullish sign for equities markets. Hence, a post-decline plateau is a concern as it points to the ossibility of a rising VIX in the near term which will be negative for equities markets. We will be watching the direction of he VIX index very closely after it completes its current consolidation phase.

Strategy : Maintain bullish view
It is not an easy call for the near term, but we are marginally tilted to the positive side of things. We maintain our bullish view in the short term, mid term and long term as we expect local CPO and property stocks to maintain its upward move.However, as CPO prices and property stocks are integral to sustain our rally into the next upward phase, we will bemonitoring these two variables closely to look out for any