FBM KLCI poised to test new highs

Shares on Bursa Malaysia managed to coat-tail the stronger performance on overseas financial markets last week which were lifted by further signs of economic recovery from the US ISM services index and Australia’s surprise hike in interest rates, shoring up the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) from a two-week correction to close at a fresh 16-month high.

The FBM KLCI advanced 27.57 points, or 2.3 per cent, last week to close at 1,233.82, with a sharp rally in CIMB, which rose RM1.08 to contribute almost half of the index’s gain for the week. Genting Bhd and Public Bank were the other two major gainers. Average daily traded volume and value improved to 721.9 million shares worth RM1.18 billion from 598.2 million shares worth RM848.7 million in the previous week.

Australia’s rate increase last week took everyone by surprise. The decision bolstered gold and stock prices as it fuelled optimism about economic outlook and heightened thoughts about reflation as markets are becoming increasingly confident that the corrective measures put in place to correct the economic malaise since last year have started to yield positive results and will gain momentum. Nonetheless, it is important to note that Australia managed to stay afloat during this hard period and is one of the few countries in this region that escaped a recession. Thus, Malaysia is not likely to follow the move until the first half next year.

The US dollar was the obvious loser as investors increased their exposure to high-yielding assets on rising risk appetite and anticipation of similar rate increases elsewhere that would make the greenback weaker vis-à-vis other majhor currencies. A weaker outlook for the US dollar is positive for commodity prices. Gold prices rose as investors flocked to hold this glittering commodity to minimise the erosion in their value from holding US dollar-based assets. It is just a matter of time before similar price movements are reflected in other commodities like crude oil and crude palm oil due to improving demand and to compensate the erosion in purchasing power.

So, investors should start sniffing around for undervalued oil and gas and plantation stocks. Property plays are also a good choice when inflationary pressures are rising. Comparatively, there are many small and mid-cap oil and gas stocks that are still trading at a single digit price-to-earnings ratio (PER), which is a huge discount to FBM KLCI’s price-to-earnings ratio of 16x.

For instance, Pantech Group Holdings, which announced a good set of first-half fiscal year 2010 results last Friday, is trading at only a calendar year 2010 PER of 6x and promises good capital gain potential based on a target price of RM1.55. This target price is based on a 20 per cent discount to target sector PER of 12x on CY10 earnings due to its smaller market cap and low liquidity. Apart from a low PER, earnings growth from a new manufacturing facility that it plans to build and its acceptable dividend yield of 3.1 per cent are valid attractions to hold the stock.

The outcome of Bagan Pinang by-election would impact the FBM KLCI this week. It is expected to be positive as chances of Barisan Nasional defending its stronghold are high. As such, the FBM KLCI could test the 1,248 resistance this week.

The dramatic outcome of the MCA extraordinary general meeting was totally unexpected and it adds to the current uncertainty. Datuk Seri Ong Tee Keat has the option to stay (as the vote of no-confidence lacks a two-thirds majority), call for another EGM to choose new leaders or appoint a third person to take over the helm until the next party elections.

Technical Outlook
Selective buying of key index heavyweights on Monday, highlighted by a trading error which lifted KLK’s share price sharply, shored up the FBM KLCI to close 10 points higher for the day. However, the broader market breadth was negative on weak buying momentum. The local market failed to copy a strong regional rebound the next day, sparked by an overnight US rally after the ISM services index registered the first growth after 11 straight months of decline and a surprise interest rate hike by Australia due to outlook for economic growth.

On Wednesday, stocks staged a rebound backed by more robust trading volume which rose to a seven-week high, as they coat-tailed further strength in global markets due to more signs of economic recovery. The subsequent two days saw the market gain further strength, as better-than-expected economic data and third quarter earnings from the US increased investor optimism.

The KLCI rose from an intra-week low of 1,203.27 early Monday and traded up to a 16-month high of 1,236.89 on Friday late morning for an expanded 33.62-point trading range last week, against the 16.17-point trading range the previous week. Week-on-week, the FBM-EMAS Index climbed 184.18 points, or 2.3% to close at 8,279.43, while the FBM-Small Cap Index (SCI) gained 263.84 points, or 2.7% to 10,051.31.

The daily slow stochastics indicator for the FBM KLCI flashed a buy signal early last week (Chart 1), but the weekly indicator retained its bearish divergence signal at the highly overbought zone. The 14-day Relative Strength Index (RSI) indicator has re-hooked upwards with a high reading of nearly 70, similarly for the 14-week RSI with an overbought reading of 74.45.

Meanwhile, a buy signal has been triggered on the daily Moving Average Convergence Divergence (MACD) trend indicator, while the weekly MACD signal line has re-hooked upwards. The ADX line on the 14-day Directional Movement Index (DMI) trend indicator has appreciated for a better reading at 39.86, signaling strengthening up-trend, reinforced by expanding +DI and –DI lines.

Conclusion
Given the more positive technical indicators for the FBM KLCI, highlighted by a buy signal on the daily slow stochastics and MACD indicators, there should be further upside potential for the local stock market following the bullish breakout to close at a fresh 16-month high last Friday. However, it is crucial that buying momentum improve above the 1-billion-share mark on a daily basis to sustain last week’s breakout and achieve higher levels in the immediate term.

Chart wise, investors should look to sell on rally AMMB and take profit on CIMB given the already strong gains enjoyed by these two key banking heavyweights ahead of profit-taking correction in the near term. Maintain buy call on Genting Bhd on expectation of further upside potential towards the RM8 level.

As for lower liners, Sino Hua-An, MRCB, UEM Land and Zelan are also buys, but look to sell on rally Dialog and SapuraCrest which are expected to see stronger profit-taking and selling following the breakout from consolidation last week.

As for the benchmark index, last week’s breakout has improved upside possibilities with immediate upside target at 1,248, representing the 61.8 per cent Fibonacci Retracement (FR) of the tumble from the 1,525 all-time high to the 801 low. The next significant chart resistance is at 1,271, which was an important pivot low on May 5 last year, and then 1,305, the April 29 pivot high. On the downside, immediate support is revised higher to 1,220, with 1,213 and then 1,201, which are previous important retracement supports, to cushion shallow profit-taking corrections ahead.