Weekly Expectation

For this week, I think volume expansion crucial for further rally. Last week, improved regional sentiment on hopes the US will keep interest rates low for a prolonged period, better-than-expected earnings from a slew of blue chip companies and strong fourth quarter GDP numbers helped the local stock market sustain gains for a third straight week.

For the week, the blue chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) rose 13.11 points or 1.04% to 1,270.78, with Axiata (+6.28 points to the index), CIMB (+5.26), Maybank (+1.36) and Maxis (+1.08) leading gains. Daily average traded volume and value improved to 695.6mn shares worth RM1.25bn, compared with the 589mn shares and RM1.06bn average the previous week.

The 17-point rally post CNY or a 0.9% month-on-month expansion in the benchmark index was not as strong as expected to call a termination in the rally as the vibrant corporate earnings and higher than expected expansion in the domestic economy support a further extension in FBM KLCI. Any knee jerk reaction following a potential hike in Overnight Policy Rate subsequent to the GDP announcement should be viewed as a buying opportunity ahead of the unveiling of a new economic model for Malaysia this month, which could coincide with Invest Malaysia 2010 on 30th and 31st.

A rate hike is likely to lift the average lending rate of banks that has dived to historical lows due to competitive pressure, which is positive for banks. It is not expected to derail loan growth and take away attention into PDS or bond market as it is natural to expect corporations to issue PDS to take advantage of the low rates in the midst of rising pressure on yield curves, which has steepened.

Nonetheless, it is noteworthy to take note that the demand now is for the high-quality AAA-rated and government guaranteed debt papers. In fact, the spread between the high and low quality PDS has widened and not many players can qualify for a highly rated paper.

Thus, despite an increase in OPR, most companies will find it more feasible to ride on the cheaper bank loans. In fact, gross loans grew at a faster pace of 8.6% year-on-year (yoy) in January this year against 7.8% yoy in last December, and this year’s loan growth is expected to exceed 12% with business loans driving the growth and consumer loans remain resilient on the back drop of a recovering economy.

A rate hike will mostly benefit banks that have high exposure to floating-rate loans and lower proportion of short-tenured deposits like Alliance , EON Cap, Maybank and RHB Cap.

Nonetheless, an anticipation of a rise in average lending rate will have its fair share of negative repercussion on auto and property players with cost of borrowings going up. The same applies to companies with high debts. So watch out for price correction in some of those players like Proton that could provide an opportunity to buy on weakness, ahead of a potential JV with a foreign partner.

Immediate downside risk is an increase in car prices if it follows the footstep of some Japanese marques like Honda, which is expected to raise car prices by RM1,000 to RM2,000 starting this week due to Yen’s strength.

With regards to domestic economic data, unemployment rate will be announced today followed by OPR and trade numbers on Thursday and Friday respectively. The outcome of the last two items can have some impact on the market. The US will release some important data such as personal spending, ISM manufacturing, vehicle sales, pending home sales, unemployment rate and nonfarm payrolls as well.

Technical Outlook
Spot month February KLCI futures contract traded on Bursa Malaysia Derivatives Berhad expired at 1,276, surging 24 points, or 1.9% week-on-week to reverse to a 5.22-point premium to the cash index, compared with the 5.7-point discount the previous week.
Bursa Malaysia shares rose on Monday as investors bought blue chips, encouraged by regional strength after slower-than-expected US inflation data raised hopes the Federal Reserve will keep interest rates low. Blue chips ended mixed the next day on moderate volume as trading interest centered on rubber glove stocks.

Nevertheless, the market bounced back on Wednesday as index heavyweights CIMB and Axiata led gains after reporting better-than-expected earnings. Stocks closed flat the next day as profit-taking interest picked up ahead of the long three-day weekend break, due to the religious holiday on the birthday of Prophet Muhammad.

The KLCI rose from opening low of 1,260.51 on Monday and climbed to peak at high of 1,277.66 prior to month-end position squaring, causing the trading range expansion to 17.15 points, compared with the narrow 9.13-point range the previous week. The FBM-EMAS Index climbed 106.33 points or 1.3% last week to close at 8,560.2, while the FBM-Small Cap Index advanced 193.71 points, or 1.85% to 10,637.46.

The daily slow stochastics indicator for the KLCI has leveled at the overbought region (Chart 1), but is offset by the weekly indicator which hooked up from the initial oversold level. The 4-day Relative Strength Index (RSI) indicator continued leveling with a more positive reading of 53.92, while the 14-week RSI registered an improved reading at just above 60.

Meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator registered a bullish expansion following early last week’s buy signal, while the weekly MACD is in a late bearish stage. As for the 14-day Directional Movement Index (DMI) trend indicator, the +DI and –DI lines crossed for a buy signal, but the sustained decline of the ADX line indicate absence of trend.

On the current technical situation, further strength on KLCI will reinforce the daily MACD buy signal last week and subsequently trigger a weekly stochastics buy signal, offsetting the overbought daily indicator. Last Friday’s more robust buying momentum looks promising, but nonetheless, stronger participation in excess of one billion shares per day will be crucial for a sustainable breakout from the current consolidation phase.

Meanwhile, stronger-than-expected economic data from the US and regionally will be an added boost to market sentiment this week.

In the immediate term, the index should meet resistance at 1,276 and 1,288, the respective 61.8% and 76.4% Fibonacci Retracement (FR) of the sell-down from the 21 January high of 1,308 to the 9 February pivot low of 1,224, where profit-taking and selling should stall gains. A decisive breakout above the 50-day moving average, currently 1,272, backed by robust buying momentum, will enhance the recovery.

Meantime, immediate supports cushioning downside are at the 100-day moving average at 1,263, then 1,256, the 38.2%FR, with 1,249 and 1,240 as stronger downside buffers.

Happy hunting.