KL market seen rangebound, trendless

Expect heavily bashed down cash-rich gaming counters such as Genting and Resorts World to attract more buyers on any further dips, says a research head

CONCERNS over a looming global recession and weak corporate profits last week overshadowed positive leads from Bank Negara Malaysia's interest rate cut and the four-day rally in US stocks following the rescue of Citigroup and an additional US$800 billion economic stimulus package to boost US consumer lending.

The benchmark Kuala Lumpur Composite Index (KLCI) eased 0.74 point, or 0.1 per cent for the week to close at 866.14, as daily average trading volume shrank to 518.2 million shares, compared with 576.2 million previously.

Bank Negara Malaysia did the right thing by cutting its Overnight Policy Rate by 25 basis points to 3.25 per cent last Monday but market response was tepid due to the above reasons. The reduction is just the beginning and we could probably see another 25 basis point cut when the policymakers meet in January next year. The reason - the global economic weakness has started to rear its ugly head on local economy as evidenced by the third quarter 2008 gross domestic product that was released last Friday.

The higher than expected 3Q08 economic expansion of 4.7 per cent year-on-year against street estimate of 4.5 per cent is a welcome reprieve for the market. The services sector drove the expansion by growing 7.1 per cent, slightly lower than 8.2 per cent in the second quarter, but the remaining key sectors like manufacturing, agriculture and construction saw significant weaknesses.

No matter how less severe the slowdown appears to be now, it is a fact that we are heading into a storm next year with significant economic slowdown in all our key trading nations. For an export-oriented economy like Malaysia that saw a drastic weakness in manufacturing growth with an expansion of 1.8 per cent in the third quarter of this year against 5.6 per cent in the second quarter, growth in external demand is crucial. Softness in manufacturing activities will have a lag effect on the services sector as it will have implications on the financial sector's trade financing, corporate loans and insurance premiums; and port, cargo and shipping activities in the transportation sector. From a demand side perspective, reliance on job prospects in the manufacturing sector is heavy and it has great implications on consumption and the services sector's tourism activities.

Thankfully, we still have ample liquidity in the financial system, huge foreign reserves and current account surplus to weather the storm.

The softer economic expansion will have negative effect on corporate profits next year. The recently concluded corporate result season was very uninspiring with many companies reporting lower- than-expected earnings. Although cost pressures seem to be easing, the pace of decline in demand for good and services will suppress earnings growth. Against such a backdrop, the 2009 outlook for the KLCI is not expected to be bright.

As for this week, market activities will continue to be news driven and possibility of a bear market rally is still intact. The drive could come from the US if Congress approves a comprehensive bailout plan for its car industry tomorrow, which coincides with the announcement of US vehicle sales numbers. The release of the ISM manufacturing index today will shed some light on the health of the US manufacturing sector. Investors are advised to trade cautiously and stick to defensive stocks with solid fundamentals in the consumer, gaming and power sectors.

Technical outlook

The local stock market fell in line with regional markets last Monday as investors fret over a looming global recession after the IMF predicted recessions in major developed economies next year. Despite a strong rebound in the region the next day following the rescue of Citigroup by the US Government and interest rate cut by Bank Negara, local stocks stayed rangebound on weak buying momentum. The domestic market again ignored the firm regional trend as investors reacted negatively to weak corporate results and the double limit-down losses in Ramunia shares after MISC aborted its reverse takeover bid. The KLCI tumbled to an intra-week low of 848.03 last Wednesday.

However, the market staged a strong comeback the next day, boosted by the four-day rally in US stocks and China's interest rate cut by 108 basis points, the most in 11 years, to stimulate domestic growth. The KLCI eventually closed at the intra-week high of 869.98, but then fell into rangebound trading last Friday, with sentiment turning cautious again.

The daily slow stochastic indicator for KLCI has flashed a buy signal following last Thursday's strong gain (Chart 1), reinforcing the buy signal on the weekly indicator. However, a hook-down on the 14-day Relative Strength Index (RSI) indicator and weak posture on the 14-week RSI in the oversold region suggest upside momentum remained weak.

On the trend indicators, the daily Moving Average Convergence Divergence (MACD) trigger line levelled further to mirror the weekly MACD, suggesting trading should stay rangebound in the immediate term. Meantime, the ADX line on the 14-day Directional Movement Index (DMI) trend indicator has also levelled, suggesting the trend-less market will persist in the short term.

Conclusion

The strong performance in the US S&P500 Index, which surged more than 12 per cent last week, its best weekly rise since 1974, on speculation government bailouts will resuscitate the world's largest economy, should aid sentiment in the region and hence locally this week. Nevertheless, concerns over a deepening global recession next year should cap gains, with the anticipated window-dressing gains unlikely to be spectacular unless buying momentum improves significantly. Investors should closely monitor in what manner the US Congress will approve a bailout of the car industry.

As for the KLCI, immediate resistance is anticipated at 879, the 38.2 per cent Fibonacci Retracement (FR) of the bear market rally from the 801 pivot low of October 28 to the 926 high of November 5, with next resistance seen at 888, representing the 23.6 per cent FR of the plunge from the pivot high of 1,164 on July 31 to the 801 pivot low. Formidable upside hurdle is at the psychological 900 level. Immediate support stays at 849, the 61.8 per cent FR of the bear market rally, with the 76.4 per cent FR at 830 providing a more sustainable support platform.

Stock-wise, expect heavily bashed down cash-rich gaming counters such as Genting Bhd and Resorts World to attract more buyers on any further dips to stronger chart supports, which will enhance the risk/reward ratio upon an eventual medium-term recovery.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.