RECOVERY KEY TO SUSTAIN RALLY

LAST week, the local benchmark index managed to fully recoup the previous week’s loss on local fund support, despite the cautious external tone amid the United States-China trade talks and tit-for-tat trade tariffs on combined total of US$100 billion (RM409.15 billion) of goods.

However, early optimism over trade discussions between US and China faded, and concerns over escalating US-China trade tensions encouraged profit-taking ahead of the weekend.

For the week, the local benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) rose 25.12 points, or 1.4 per cent, to 1,808.59. Nestle (+RM1.10), Hong Leong Bank (+82 sen), HLFG (+48 sen), Public Bank (+40 sen) and Axiata (+37 sen) represented most of the index’s gains.

Average daily traded volume and value last week improved to 2.41 billion shares worth RM2.28 billion, compared with 2.18 billion shares and RM2.13 billion, respectively, the previous week.

The V-shape recovery of the FBM KLCI since last July, thanks to active buying from mostly cash heavy local funds, is encouraging but its sustainability is questionable, if not supported by strong earnings growth prospects vis-àvis its regional peers that are mostly showing double-digit earnings expansion.

The ongoing second quarter result reporting season will enter its final leg this week and the results of 54 companies that have reported their earnings so far out of the 106 companies tracked did not indicate any strong possibility for an earnings re-rating.

The performances were largely within expectations, except for companies in the oil and gas and plantation sectors that mostly reported results that came below consensus expectations.

This not so exciting earnings growth trajectory could come under pressure if the trade war between the US and China escalates next month when the US is expected to impose another round of tariff hike on US$200 billion worth of Chinese imports covering some 6,000 products.

On the local front, Malaysia’s headline inflation data for last month, which was released last Friday, showed room for monetary easing should the economic situations warrant on the back of limited scope for fiscal expansions as the government prioritizes its growth measures to reduce the nation’s debts.

The local consumer price index (CPI) was unchanged at 0.9 per cent year-on-year (y-o-y) last month versus 0.8 per cent y-o-y in June.

The inflationary pressure for the first seven months of the year was still tame at 1.4per cent y-o-y, thanks to the removal of Goods and Services Tax (GST) in June.

Even with the reintroduction of Sales and Services Tax on September 1 the impact on inflation is expected to be less significant and manageable as it will only affect 38 per cent of the basket of goods and services of the CPI, as compared with 60 per cent under the GST previously.

Thus, the CPI for this and next year could range only between 1.5 and two per cent.

Technical Outlook

Bursa Malaysia shares edged higher on Monday on guarded optimism over the potential for the US-China trade discussions to defuse trade tensions. The index rose 4.11 points to close at 1,787.58, off an early low of 1,782.74 and high of 1,791.14, but losers beat gainers 497 to 383 on total turnover of 2.29 billion shares worth RM2.05 billion.

Local funds support helped the index extend gains the next day ahead of a religious holiday. It climbed 10.53 points to close at the day’s high of 1,798.11, off an early low of 1,788.86, but losers beat gainers 549 to 378 on a higher turnover of 2.52 billion shares worth RM2.43 billion.

The index added double-digit gains on Thursday, despite the cautious external tone as US-China trade talks began amid tit-fortat trade tariffs on a combined US$100 billion of goods, with more to come that risk global growth. The local bourse rose 12.76 points to close at 1,810.87, off an early low of 1,799.57, as gainers led losers 485 to 419 on a reduced turnover of 2.25 billion shares worth RM2.46 billion.

Stocks slipped into correction mode the following day, as optimism over trade discussions between US and China faded, and concerns over escalating US-China trade tensions encouraged profit-taking. It lost 2.28 points to end at 1,808.59, off an early low of 1,798.84, as losers swarmed gainers 638 to 267 on higher total turnover of 2.59 billion shares worth RM2.2 billion.

Last week’s rebound on the FBM KLCI resembled a V-shape recovery, which helped lift the daily slow stochastics momentum indicator back up to the bullish extended zone, reinforcing the rise on the weekly indicator’s signal line.

The 14-day Relative Strength Index (RSI) indicator also recovered to the bullish zone, but stalled on Friday with a still positive reading of 66.20, while the 14-week RSI indicator hooked back up for a reading of 53.91 on Friday.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) trend indicator hooked back up to neutralise the previous week’s sell signal, while the weekly MACD indicator retained a bullish bias.

On the 14-day Directional Movement Index (DMI) indicator, the +DI and -DI lines expanded positively on a rising ADX line, signalling a return of the current uptrend.

Conclusion

The improvement in the shortand medium-term momentum and trend indicators for the FBM KLCI following last week’s Vshape recovery implies more potential upside for the index.

Nonetheless, unless the negative divergence on the broader market ends, as lower liners and small cap stocks remain stuck in correction mode, it does not bode well for sustainability of this recovery.

Moreover, potential for increased volatility in external markets should encourage profittaking or selling on strength to keep gains in check.

Stocks-wise, exporters and construction-related counters like Globetronics, Inari Amerton, SKP Resources, Unisem, VS Industry, Hiap Teck, MRCB and Sunway Construction may undergo further profit-taking corrections, given their bearish shortterm technical momentum.

Unless the negative divergence on the broader market ends, as lower liners and small cap stocks remain stuck in correction mode, it does not bode well for sustainability of this 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.