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 Mahamad Rodzi Abdul Ghani
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 Business Times
 Strong liquidity to fuel upside

2/4/07 (Business Tiness )  -  DESPITE a mid-week scare sparked by concerns over the deteriorating US housing market situation and surging crude oil prices above the US$60-a-barrel mark, buyers returned by the end of the week to shore up global and Bursa Malaysia equities, enabling the benchmark Kuala Lumpur Composite Index (KLCI) to rise for a second week.

Week-on-week, the KLCI added 11.22 points, or 0.9 per cent to close at 1,246.87, with average daily trading volume surging to 2.46 billion shares compared with 1.78 billion shares in the previous week, fuelled by the strong return of retail participation in lower-liner penny stocks.

Interest could switch to oil and gas stocks this week as crude oil prices continue to soar near US$70 per barrel.

Coincidentally, as the value of oil and gas projects announced in the first quarter underperformed market expectations, anticipations are building up for announcement of some big ticket items in the immediate to short term. This may trigger some renewed buying interest in players like Petra Perdana, KNM Group, Scomi Group, Sapura Crest, Tanjung Offshore, Perisai Petroleum and Alam Maritim. Players like Sumatec may benefit as well on news of that it has found traces of gold at its mine in Terengganu and may produce 30kg of gold in this year alone. Although implementation of the changes in Morgan Stanley Capital Index effective May 31 will see the removal of stocks like Scomi Group from the list, the impact on the share price is expected to be minimal due to its low foreign shareholding.

Obviously, the rise in crude oil prices will benefit crude palm oil (CPO) as a raw input for palm-based biodiesel. IOI Corp remains a good proxy for exposure into CPO despite the surge in price subsequent to the buy call in earlier write-ups a few weeks ago.

Market will also be eagerly anticipating the outcome of the high profile meeting between our Prime Minister and Volkswagen's top officials this week.

On a broader perspective, there is no change in my view that the bull cycle is still intact and the KLCI will rise to a new all-time high this year. The base case target remains at 1,350 based on bottom-up valuation on the index-linked stocks while the abundant liquidity could push the index further by another 10.4 per cent to match my best case target of 1,490 for the year. While the index could form a double peak at 1,285 over the next two weeks, none of the indicated targets are expected to be hit in the second quarter of this year.

The Malaysian equity market is one of the best-performing markets in this region with the Kuala Lumpur Composite Index surging 13.7 per cent in the first quarter of the year, the best ever first quarter performance in the last seven years. In fact, this is the third time since 1997 that the KLCI has expanded for three consecutive quarters. If history is of any guide, chances for another quarter of continued expansion are very slim and April has outperformed March only three times in the last eleven years.

What does that imply? It clearly reflects potential opportunity for bottom fishing in the second quarter, which is expected to be prevalent in the month of May or June 2007. Based on the current underlying strength in the index, investors should look for exit opportunities in the month of April. This window of opportunity to exit is likely to last over the next two weeks based on current market dynamics.

Technical Outlook

Spot month KLCI March futures contract traded on Bursa Malaysia Derivatives Bhd expired at 1,244.5 last Friday, adding eight points week-on-week for a minor 2.4-point discount to the cash index. However, new spot month April futures contract closed at 1,232 for a wider 14.9-point discount, pressured lower by short selling and rollover of short positions ahead of the weekend.

KLCI extended its rise to stall at a new one-month high of 1,248.98 last Tuesday, before profit-taking and selling picked up steam to drag blue chips lower the next day, capping a nine-day winning streak on the benchmark. However, buyers returned to cushion downside above the 1,220 immediate support, picking up momentum by Friday to lift the index to a strong close for the week.

Lower liners continue to feature prominently on active retail participation, with especially construction and property stocks dominating the gainers list on active trading. The Second Board Index (SBI) increased another 2.18 points, or 2.24 per cent to close the week at 99.34, while the Mesdaq Composite Index (MCI) added 0.3 per cent to 138.49.

The daily slow stochastics trigger line has re-hooked upwards at the overbought zone, suggesting near-term upside bias as buying momentum remained strong. The downward journey on the weekly stochastics has slowed somewhat to indicate reduced downward momentum. Meanwhile, the 14-day and 14-week Relative Strength Index indicators extended above the 60-point mark, improving upside momentum.

The daily Moving Average Convergence Divergence (MACD) expanded higher following the previous week's buy signal, while the re-hooking upwards of the weekly MACD reinforce the present bullish momentum. The daily Bollinger bands are beginning to expand again, suggesting increased market volatility in the near-term.


For the KLCI, a convincing breakout above the immediate resistance of 1,250 (IR) this week will fuel upside towards next resistance at 1,265 (R1), with any further rally towards the 14-year peak of 1,285 (R2) on February 26 seen to meet significant profit-taking interest. Any attempts to trigger breakout above this peak should encounter stronger selling interest, especially towards the psychological 1,300 (R3) level. The immediate support remains at 1,220 (IS), which cushioned downside during last week's profit-taking dip, with the flattening 30-day SMA near 1,213 and the resistance-turn-support base of 1,200 (S1) acting as stronger support platforms.

On the broader market, the strong retail participation on lower liners last week should sustain further upside, as buying momentum shift to favour lower-liner construction and property stocks on optimism that they will benefit from the Ninth Malaysia Plan and generous tax breaks on property purchases. Buying interest should also sustain on palm oil and oil and gas stocks as the surge in crude oil prices will revive demand for biodiesel as an alternative energy source and oil and gas support services.

Malaysian Palm Oil Board ( MPOB ) Lot 6, SS6, Jalan Perbandaran, 47301 Kelana Jaya, Selangor Darul Ehsan, MALAYSIA.
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