FBM KLCI >>> A Healthy Correction Ahead

RESURGENT rotational buying of lower liners and better-than-expected economic data from US, Europe and Asia managed to lift the local stock market and the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) for a fifth straight week of gains to track a 13-month high. Plantation stocks led the way as investors increased their bet that commodities will see a revival in demand with the eurozone registering better-than-expected gross domestic product growth in the second quarter and China's resilient retail sales expansion of 15.2 per cent in July.

For the week, the FBM KLCI rose 3.69 points, or 0.3 per cent, to end at 1,188.57. Gains in IOI Corp (+3.42 points for the FBM KLCI), Sime Darby (+2.39), and KLK (+2.38) were offset by losses in Maybank (-4.23) and Genting Bhd (-1.47). Average daily traded volume and value recovered to 1.07 billion shares worth RM1.58 billion respectively, compared with 961.3 million shares and RM1.54 billion in the previous week.

Global market trends played a crucial role again in the FBM KLCI's movement last week. After reacting positively to the US market's performance on Monday, the FBM KLCI went into a sharper correction on Wednesday when worries about earnings surfaced after China warned about a slow recovery in its exports. Although the 23 per cent contraction in China's exports for July met consensus expectation, it was higher than June's contraction of 21.4 per cent,thus the worry that domestic expansion may not rise fast enough to absorb the impact of slower recovery in exports.

From a fundamental viewpoint, trading at 16.4x CY10 PER, the FBM KLCI is more expensive than the benchmark indices of Singapore (14.8x), Indonesia (13x), Thailand (10.5x), South Korea (10.5x) and Hong Kong (15.1x), which explains in part the less vibrant foreign activities and more dominant participation of locals. Thus, the fact that the FBM KLCI has outperformed only the Nikkei and has underperformed the rest of the region in terms of year-to-date gain should not necessarily translate into an attraction unless earnings improve.

Until then, we should see more visible signs of a two-tier market where other big- and medium-cap plays playing catch-up with stocks listed in the benchmark index. While a minor setback in the benchmark index is expected this week, there are still buying opportunities. It is heartening to see that big-cap plays like Commerce, AMMB and Air Asia reported better-than-expected earnings in the ongoing second-quarter 2009 results season.

While Commerce is a "sell" as the share price has already fully factored in the earnings surprise, AMMB (Buy, Target Price: RM5.00) and Air Asia (Buy, RM2.20) are undervalued and worth buying.AMMB not only has registered healthy loan growth and gained market share in deposits, it also has shown a steady improvement in containing costs after its solid partnership with ANZ Bank.

Lower liner steel and construction-related stocks Sino Huaan, Kinsteel, Perwaja, MRCB, Ranhill and UEM Land remain top technical picks to out-perform the broader market.

TECHNICAL OUTLOOK

The daily slow stochastics indicator for the KLCI has dipped to the neutral region following last week's sell signal at the overbought region (Chart 1), but the weekly indicator continued to claw higher into the overbought zone. The 14-day and 14-week Relative Strength Index (RSI) momentum indicators remained in overbought territory with a reading of 74.58 and 76.63 respectively.Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator is in bearish mode following last Monday's sell signal, but the weekly MACD indicator continued its upward expansion. The 14-day Directional Movement Index (DMI) trend indicator is still in bullish trending mode, with a higher reading on the ADX line of 56.54 as of last Friday.

IN A NUTSHELL

On blue chips, investors should buy on dip defensive gaming stocks Genting Bhd and Genting Malaysia given that the H1N1 virus scare has pressured share prices down to more bargain levels. Lower liner steel and construction-related stocks Sino Huaan, Kinsteel, Perwaja, MRCB, Ranhill and UEM Land remain top technical picks to out-perform the broader market. Also buy on dip Kencana and Wah Seong, while buy DNP, Hovid, Leader and RCE Capital on any profit-taking dips.As for the KLCI, immediate support upon correction is set at 1,180, with 1,171, then 1,164 and 1,156 acting as stronger support platforms. On the upside, the significant upside hurdle will be at the 1,200 psychological level, which requires a bullish breakout to aid further upside towards 1,220, and then 1,248, which represents the 61.8 per cent FR of the fall from 1,525 all-time high to 801 pivot low, acting as a major resistance.