Momentum remains bullish

Malaysian plantation and oil & gas stocks are expected to out-perform this week given the strong rebound on crude oil prices in New York

THE Kuala Lumpur stock market managed to stage a mild window-dressing rally in the holiday-shortened three-day week which extended to the first trading day of the new year, as investors swarmed in to lift the benchmark Kuala Lumpur Composite Index (KLCI) to a near two-month high. The KLCI climbed 27 points, or 3.1 per cent, last week to close at 894.36. Daily average trading volume and value expanded to 360 million shares worth RM535.8 million from 246.7 million shares worth RM280.3 million in the previous week.

The KLCI hit the year's low of 801 in October and recovered mildly to close higher for the year at 876.75. This was a 39.3 per cent year-on-year correction and the average daily volume fell 60.4 per cent to 575.8 million shares. Still, on a relative basis, the KLCI was the best performing index among regional indices last year as unlike others the Malaysian market did not enjoy a sharp rally in the first eight months of the year to warrant a severe correction.

Malaysia's resilient economy (this resilience will be severely tested this year) and sound financial system did contribute in cushioning the fall. Ironically but understandably, some of the least followed illiquid stocks like Formosa Prosonic, Sitt Tatt and Muda Holdings not only topped the small-cap segment but also emerged as the best overall market performers in 2008 because of various corporate exercises and acquisitions.

There is no change in this column's view about market outlook for 2009 as published four weeks ago. Although the strong rally on the first trading day of the New Year was unexpected, it was within this column's prognosis of a bear market rally in first quarter that will drive the index to hit its fair value of 1,050 based on a bottom-up approach. I still believe a market bottom of 670 to 725 points based on 1997 and 1998 trough PER of 8.3x and 9x could be seen in the third quarter of this year before it rebounds to close the year at 850. This is a contrarian view to a market that expects the index to bottom in the first half and rebound in the second half.

A bear market rally is expected early in the first quarter due mainly to external factors and the Capricorn Effect. Developments in the US after Barrack Obama takes office as president will be the cornerstone for any rebound in global equity markets as he is expected to approve a massive fiscal stimulus programme to restore US economic growth that will sustain job creation and long-term expansion.

Global equity markets are expected to react positively to this stimulus that will coincide with the momentum created by the seasonably visible Capricorn Effect. The local market is expected to sustain this momentum, to a lesser degree, in the first quarter, with a change in the country's leadership in March that could be followed by a stimulus package to prop up domestic expansion.

Market correction will continue in the second and third quarters as the unprecedented fiscal stimulus, monetary loosening and corrective measures undertaken by governments around the world will take some time to correct the economic imbalance and bring the desired results. Disturbing economic data that are expected to emerge from Europe and countries in Asia like China and Japan will cap the upside and lead to more corrections in the index in those quarters before market moves ahead of a significant economic recovery, which is only expected in 2010, in the fourth quarter.

For this week, expect the positive momentum from last week to continue unless the trade numbers that will be released on Wednesday turned out to be worse than expected. Consensus figures are 6.2 per cent and 5.3 per cent contractions in exports and imports respectively.

Technical outlook

Buyers returned to Bursa Malaysia last Tuesday after the weekend Awal Muharam holiday break, triggering a window-dressing rally encouraged further by gains in Asia. The KLCI surged from an opening low of 868.64 to close 1.65 per cent higher at the day's high of 881.63, but buying momentum stayed weak. The next day the market ended 2008 in a whimper, as window-dressing toned down with most investors still on their year-end holidays. Subsequently, the benchmark index fell by 4.88 points, or 0.6 per cent, to close at 876.65.

However, the first trading day of 2009 witnessed the return of investors, encouraged by the strong recovery on Asian stock markets as regional portfolio investors reversed outflows from emerging markets. The KLCI was lifted to a two-month high of 897.26 ahead of the weekend.

The daily slow stochastic indicator for KLCI flashed an early buy signal above the mid-point (Chart 1) to suggest good short-term upside potential, while the weekly indicator rose further towards the midpoint, implying further uptrend continuation. The 14-day Relative Strength Index (RSI) has strengthened above the neutral mark with a reading of 61 last Friday, while the 14-week RSI has triggered a buy signal after rising above the oversold level.

Meanwhile, the daily Moving Average Convergence Divergence (MACD) trigger line has also improved with a bullish crossing above the zero mark, while the weekly MACD indicator extended upwards following the previous week's buy signal. Meantime, the +DI has crossed above the -DI line on the 14-day Directional Movement Index (DMI) trend indicator to trigger a buy signal, thereby reversing the previous week's bearish reading.

Conclusion

With all technical momentum and trend indicators on the KLCI that been tracked flashing bullish signals, further upside bias is in store this week. Moreover, the bullish breakout last Friday above 888, coinciding with the upper band of the downtrend channel from the all-time high of 1,525, will enhance upside momentum towards an immediate target of 920 to 926. Further up, look for stronger resistance from 940 to stall gains, with 949 acting as a more formidable upside hurdle. Meantime, immediate support is revised upwards to 888, with stronger supports seen at 880, then 864 and 850.

Sector wise, plantation and oil & gas stocks are expected to out-perform this week given the strong rebound on crude oil prices in New York, which was sparked by increased geopolitical concerns in the Middle East.

Investors should look to take profits or sell on rally banking stocks such as AMMB, BCHB and Maybank. Interest in the sector will dissipate as loan growth slows and non-performing loans rise this year.

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