Strong breakout rallies on core banking and plantation stocks last week shored up the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) to a fresh two-year high, before profit-taking correction towards the end of the week forced stock prices to close off best.
The FBM KLCI added 11.42 points or 0.88 per cent last week to settle at 1,311.20, with Public Bank (+50 sen), PPB Group (+RM1.34) and CIMB (+12 sen) dominating gains to contribute more than four-fifth's of the index's rise. Daily average traded volume and value was marginally lower at 880.4 million shares worth RM1.6 billion, compared with 884.7 million shares worth RM1.53 billion in the previous week.
The FBM KLCI hit the year's high of 1,334.34 last Thursday and the positive sentiment that drove up the market was not confined to the Malaysian market alone. Even the US' S&P 500 hit a 17-month high last week, driven by positive economic and corporate data.Signs of a recovery in the US labour market, improving retail sales, Citigroup's affirmation of sustainable profits and renewed strength in M&A activities instilled hope in the economic recovery process.
The underlying strength in the local equity market appears sustainable but its overbought condition could lead to technical correction this week led by core banking stocks. Maybank could top the correction list as rumours about the simultaneous resignations of three senior executives may fuel speculations about lack of cohesion and direction at the top level. Other banking stocks and recent outperformers like glove stocks may undergo similar corrections due to their overbought conditions.
Investors should take this opportunity to do selective nibbling on some picks that have good long-term earnings growth potential.
Notwithstanding the current improvement in the economy and equity market, external risks like the European debt crisis and an overheating in China's economy are still lurking beneath the surface that could act as immediate-term dampeners for the market.
On the European side, Greece is confident that its austerity measures will put the economy back on the right path without external help and the dwindling yield premium for its 10-year note echoed that markets concurred but it is still high compared to historical levels. The worries about sovereign debt defaults have eased for now but could return as Greece austerity measures are just "fill-gap" measures that would cripple private consumption and investment if the public spending are not directed towards revenue generating ventures.
Meanwhile, in China inflationary pressures are on the rise and its recent exports and property prices data suggest that more stringent tightening measures could be introduced in the future that could affect market sentiment.
The bright spot here is that a possible appreciation of the yuan could lead to further strengthening in the ringgit.
Locally, our economic standing is improving and for it to be sustained we have to be more proactive and decisive in the decision-making process while improving on the delivery mechanism.
Backpedalling on important decisions that will enhance the competitiveness of the nation in the long run due to worries about short-term repercussions should be discontinued immediately.
If unpopular measures like increasing electricity tariff and floating pump prices are delayed for socio-economic reasons, the "opportunity lost" should be recovered through other measures like removal of "rent-seekers" in government contracts, open tenders for government projects, proper checks and balances in the public administration system to avoid wastage of public funds in unworthy projects or cost overruns, and removal of restrictive and or lopsided taxes/policies that benefit a small group at the expense of wider population.
In the index futures market on Bursa Malaysia Derivatives, spot month March traded was up 13 points, or 1 per cent, week-on-week, improving to a 4.8-point premium to the cash index, against the 3.22-point premium the previous Friday.
Bursa Malaysia began trading last week on a very bullish note, with banking stocks staging strong breakout rallies following Bank Negara's decision to raise the Overnight Policy Rate (OPR) by 1/4 basis point to 2.25 per cent which will boost profit margins for most banks. The strong rally on Wall Street the previous Friday sparked by the lower-than-estimated unemployment rate also helped sentiment and brought out the bulls from hibernation.
However, profit-taking alternated with bargain-hunting for the following three days, with plantation stocks taking the baton from banks to push higher after bullish crude palm oil price forecasts by industry experts in the annual Palm and Lauric Oils Conference.
Nonetheless, trading sentiment ahead of the weekend was dampened by follow-through profit-taking interest in rubber glove stocks due to concerns their recent strong share price performance was overdone.
The FBM KLCI staged bullish breakout to peak at a new two-year high of 1,334.34 on Thursday morning, but subsequently fell to the week's low of 1,308.79 by late Friday morning to register a mildly wider 25.55-point trading range last week, against 24.22 points the previous week.
Among other indices, the FBM-EMAS Index advanced 68.45 points or 0.78 per cent last week to close at 8,805.73, while the FBM-Small Cap Index gained 28.78 points, or 0.27per cent to 10,806.25.
A sell signal triggered by the daily slow stochastics indicator for the FBM KLCI in the overbought zone implies further downward correction early this week, but the weekly indicator's bullish signal remained intact.
The 14-day Relative Strength Index (RSI) has similarly dipped below the overbought level for a sell signal with a current reading of 62.41, but the 14-week RSI rose higher to a reading of 68.88 as of last Friday.
The daily Moving Average Convergence Divergence (MACD) trend indicator sustained its positive trending signal, but the upward gradient is dissipating, while the weekly MACD continued to show a bullish convergence.
As for the 14-day Directional Movement Index (DMI) trend indicator, the +DI and -DI lines are contracting towards each other, with the ADX line ascending upwards to suggest a strengthening up-trend.
Sell signals on the daily slow stochastics and 14-day RSI indicators for FBM KLCI suggest further downside risk this week, but this is positive to neutralise the technically overbought condition brought about by last week's breakout rally.
Meanwhile, weekly momentum and trend indicators remain bullish, implying further upside potential in the medium term. As such, a correction later this week will be ideal for investors who sold the breakout rally to re-enter the market for medium-term gains going forward.
As for the best support levels to re-enter, look for immediate support upon a break below 1,308 at the 1,300 psychological level, with strong support available at 1,288, mirroring last year's high.
In any case, a further dip will find stronger support at the 50-day moving average, currently at 1,281. The 100-day moving average at 1,272 will be a concrete floor limiting downside risk. On the flipside, expect immediate resistance at 1,325, last Monday's high, with last week's high of 1,334 as a more significant resistance. A confirmed breakout will see the immediate upside of 1,341 and 1,351, the 1.382 and 1.5 Fibonacci Projection targets being challenged.
Chart-wise, it is advocated that investors take profit on core banking stocks AFG, AMMB, CIMB, Maybank, Public Bank and RHB Capital ahead of correction towards their middle or lower Bollinger bands where they may opt to re-enter.
Look for bargains in Genting Bhd, IOI Corp and Sime Darby stocks as these blue chips remain major laggards and are prime candidates for recovery. On lower liners, accumulate rubber glove makers Adventa, Latexx, Supermax, 3A Resources, Leader Universal and L&G on any further sharp declines towards stronger supports for medium-term gains.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.