The local stock market suffered a third week of sell-off initially triggered by heightened concern over the potential sovereign debt default of some European countries, dragging the benchmark index to a four-month low, before buyers returned to prop up prices on signs other EU countries are likely to bailout Greece and control the large budget deficit.
The blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) recovered 5.49 points, or 0.44 per cent, last week to settle at 1,253.39, contributed by gains on IOI Corp (+12 sen), Axiata (+8 sen), Maybank (+9 sen), AMMB (+16 sen) and Tenaga (+9 sen) . Daily average traded volume and value slowed further to 673 million shares worth RM1.11 billion, compared with the 883.2 million shares and RM1.25 billion average the previous week.
Global markets that were stifled by worries over Greece's debt crisis, liquidity tightening in China and the US government's exit strategies recovered slightly as the week draws to a close. Main reasons for clawing back some of the earlier losses were the European Union leaders' affirmation in rescuing Greece, lower than expected China's inflation and lower-than-estimated US jobless claims.
Hopes of a solution to Greek's fiscal woes, despite lack of details, assuaged investors that similar commitment from EU could be forthcoming if Spain and Portugal face trouble.
Despite the current "noise level", it is noteworthy to acknowledge that global economic conditions have improved and the current worries are more focused on the impact of counteracting measures to prevent economic overheating and inflationary pressures in the not distant future than the absence of growth.
Being the world's largest economy, actions taken by the US will be closely watched and this column believes that liquidity tightening measures like raising funds rate will be the last thing on the cards and may not happen until this July or later as the housing and job markets are still weak. Data on housing starts and building permits that will be released tomorrow is expected to result in a mixed reaction on current housing market conditions.
In the interim period, the Federal Reserve may choose to not extend its asset buyback programme that expires in March, introduce reverse repos and pay interest on reserves to limit currency circulation in the system. Perhaps, investors should monitor closely the dwindling credit spread between corporate and government debt, which is an important indicator of the private sector's willingness to take risk and pick up the baton of growth from the public sector.
Locally, no major economic indicators are due for announcement this week, except for foreign reserve numbers this Friday. Nonetheless, in the absence of any dampeners and usual pick-up in activities post CNY, investors are expected to drive up the benchmark index in the next seven trading days before the February month ends.
Fundamentally, good corporate earnings for the last October-to-December period, where the announcements will be concluded by this month-end, will be supportive of the index expansion and technical indicators, hovering in oversold territories, are pointing in the same direction as well.
Technical outlook
Spot month January KLCI futures contract traded on Bursa Malaysia Derivatives Bhd rose 3.50 points, or 0.3 per cent, week-on-week to close at 1,247, representing a 6.4-point discount to the cash index, compared with the 4.4-point discount the previous week.
Bursa Malaysia shares dipped sharply last Monday, with banks leading falls on concern China's credit tightening measures will adversely impact economic growth in the region.
Overnight losses in the US with the Dow Jones average sinking below 10,000 on concern over the fiscal stability of Greece, Portugal and Spain further depressed sentiment the next day, but speculation of an UE bailout for Greece sparked a regional rebound in the afternoon and lifted stocks off earlier lows.
Stocks extended rebound on Wednesday, encouraged by gains in Hong Kong and China due to strong exports data and increasing hopes the EU will bailout Greece. The market recouped further ground the next day with regional markets rising further on improving sentiment from slower inflation and increase in loan growth in China and as Australian jobs growth slowed.
The KLCI peaked at a high of 1,249.42 on Thursday's close and a low of 1,224.37 on Tuesday in the early morning trading session. The trading range last week was at 25.05 points, compared with the 20.75-point range the previous week.
The FBM-EMAS Index rose 30.80 points, or 0.37 per cent, last week to close at 8,436.33, while the FBM-Small Cap Index fell 49.57 points or 0.47 per cent to 10,443.76.
The daily slow stochastics indicator for the KLCI triggered another buy signal from the oversold zone following last Friday's strength (Chart 1), while the weekly indicator has fallen to the lower neutral zone.
The 14-day Relative Strength Index (RSI) indicator has recovered for a more positive reading at 41.40, while the 14-week RSI le-velled off to register a neutral reading at 56.84.
Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator has also leveled off for a less negative reading, but the weekly MACD continued its bearish journey southwards. As for the 14-day Directional Movement Index (DMI) trend indicator, the +DI and -DI lines have contracted on a levelling ADX line with a reading below 25, signalling a non-trending mode.
Conclusion
Technical momentum indicators for KLCI has improved significantly following last week's dip and rebound from oversold levels, highlighted by a daily slow stochastics buy signal, suggesting more positive sentiment this week as market players return from the long Chinese New Year break.
The sighting of a bullish "hammer" candle on the weekly chart adds weight to our bullish view that the local market would stage a strong comeback up to the end of the month. Note that the month of February has ended positive in 14 of the past 20 years, with an average gain of 3.8 per cent. The further improvement in global stock markets will provide a booster to sentiment locally, with investors likely to closely follow the performance of the Hong Kong and Chinese stock markets.
As for the KLCI, the bullish breakout above 1,249, the 38.2 per cent Fibonacci Retracement (FR) of 1,154 to 1308, will enhance upside initially to 1,256, the 38.2 per cent FR of the sell down from 1,308 high to recent pivot low of 1,224, with stronger hurdles likely at the 100-day and 50-day moving averages, currently at 1,260 and 1,273. Immediate support is upgraded further to 1,240, with 1,231, 1,224 and 1,213 as progressively stronger support platforms.
Chart-wise, banking stocks CIMB, Maybank and Public Bank are still preferred after their recent profit-taking corrections which are healthy to encourage more buying from sidelined investors. Plantation counters IOI Corp and Sime Darby are also better bargains at current levels.
On the lower-liner space, look for buying opportunities on dips in rubber glove makers Adventa, IRCB, Latexx and Supermax, while Dialog and Kencana should outperform in the medium term.
The subject expressed above is based on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
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