PERSISTENT foreign fund selling, sparked by deteriorating fiscal deficit concerns as crude oil prices tumbled to new five-year lows, forced blue chips to reverse a sharp mid-week technical rebound last week.
Weaker-than-expected economic data from China and Japan, a collapse in the Greek share market and crude oil prices falling below the US$60 (RM210) a barrel mark offset strong United States retail sales data and forced oil and gas (O&G)-related stocks to slip further.
The blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) shed 16.38 points, or 0.94 per cent, to 1,732.99, with SapuraKencana Petroleum (-31 sen), Sime Darby (-31 sen), Petronas Chemicals (-26 sen), Felda Global Ventures (-39 sen) and IOI Corp (-17 sen), accounting for most of the losses.
Average daily traded volume and value slowed to 1.31 billion shares and RM1.62 billion, compared with 1.65 billion shares and RM2.23 billion, respectively, in the previous week as most investors stayed on the sidelines, given the uncertainties and bearish sentiment of the O&G sector.
With a year-to-date contraction of 7.2 per cent, the FBM KLCI is the worst performer in this region, while key indices of close neighbours Jakarta, Thailand and the Philippines moved in the opposite direction to register strong double-digit gains.
As there are only twelve days left before the curtain falls on 2014 trading, the FBM KLCI needs strong catalysts to at least rise close to 1,800-point level.
Possibilities for a sharp reversal appear dim with the plunge in crude oil prices showing no signs of abating.
Foreign investors, worried about the impact on Malaysia’s financial standing and the sovereign rating, could keep unloading and exerting pressure on the ringgit.
While strong buying support from local funds is crucial to push the index higher, their presence could be muted by the Wall Street’s weak performance last Friday, despite the FBM KLCI’s grossly oversold position from a technical perspective.
The broader market is expected to remain cautious this week and the FBM KLCI component stocks will continue their downtrend until Thursday when the US Federal Reserve (Fed) reveals economic projections and decision on interest rates.
With tame inflation on home ground, weaker immediate term outlook for the global economy and deflationary pressures rising in tandem with the plunge in commodity prices, the Fed may refrain from issuing any strong statement about monetary tightening.
On the other hand, Brent crude oil is expected to imitate the West Texas Intermediate crude’s move to trend below US$60 and move closer to the US$50 mark in the next two weeks. That may exert more downside pressure on the FBM KLCI and O&G stocks.
As this column expects it to be a strong floor for the black commodity before it rebounds, the downside appears limited.
Point to note is that this price level is below the fiscal break-even price for all Organisation of Petroliam Exporting Countries (Opec) producers, except Qatar, and below the production break-even threshold for 90 per cent of shale producers.
Thus, many shale producers will be affected at this price. On the other hand, Saudi Arabia, which makes up about one third of Opec’s crude production, could be pressurised by other members to cut output, even ahead of June 5 meeting.
Thus, investors should take the opportunity to nibble O&G stocks that have strong earnings visibility upon further corrections.
Technical Outlook
Blue chips slipped further on Monday on foreign selling, dampened by the weak ringgit and fiscal deficit concerns.
The FBM KLCI fell 8.53 points to close at 1,740.84, off an early high of 1,750.42 and a fresh 15-month low of 1,735.92, as losers beat gainers 540 to 258 on cautious trade totaling 1.24 billion shares worth RM1.52 billion.
It extended losses the next day, dampened by persistent foreign selling, after regional stocks slumped as crude oil prices tumbled to new five-year lows of US$62 a barrel.
The key benchmark dipped 2.74 points to end at 1,738.10, off the opening high of 1,741.31 and low of 1,730.77, as losers swarmed gainers 647 to 216 on lacklustre turnover of 1.44 billion shares worth RM1.7 billion.
Index-linked blue chips staged rebound on Wednesday, as local funds bought selectively in the absence of foreign selling pressure despite negative external leads from China’s weak data and a collapse in the Greek share market.
The FBM KLCI surged 27.42 points to day’s high of 1,765.52, off an opening low of 1,732.76, as gainers led losers 502 to 284 on cautious turnover of 1.21 billion shares worth RM1.6 billion.
However, it retreated the following day, in line with weaker regional markets as falling oil prices and worse-than-expected machinery orders report from Japan reinforced jitters about a sluggish global economy. The FBM KLCI fell 20.95 points, to 1,744.57, off a high of 1,757.19 and low of 1,742.35, as losers bashed gainers 626 to 178 on muted turnover of 1.22 billion shares worth RM1.5 billion.
While regional markets edged higher on Friday due to strong US retail sales data, the local market extended losses led by O&G-related stocks after crude oil prices dipped below the US$60 a barrel mark.
The index lost another 11.58 points to end at the day’s low of 1,732.99, off an early high of 1,748.76, as losers swarmed gainers 690 to 178 on higher turnover of 1.45 billion shares worth RM1.78 billion.
Trading range for the local blue-chip benchmark index was as 34.75 points last week, compared with the 80.91-point range in the previous week, as blue chips pulled back from a sharp mid-week rebound due to the bearish undertone.
The FBM-EMAS Index retraced 181.9 points, or 1.5 per cent, last week to 11,866.47, while the FBM-Small Cap Index slumped another 745.7 points, or 4.8 per cent, to close the week at 14,777.27, as selling pressure sustained on small-cap stocks with retailers further reducing exposure in speculative issues.
The daily slow stochastic momentum indicator for the FBM KLCI remains oversold, given last week’s extended correction, while the weekly indicator deteriorated to signal sustained bearish momentum.
The 14-day Relative Strength Index (RSI) indicator retreated to a weak reading of 32.85 as of last Friday, while the 14-week RSI hooked lower to a bearish reading of 30.65.
On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line continued to deteriorate, confirming the bearish trend reading on the weekly MACD indicator, which signal an acceleration of downtrend ahead. The -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator sustained bearish expansion on a rising ADX line, suggesting a stronger down-trend.
Conclusion
Given the extremely bearish trend and momentum indicators for the FBM KLCI following the past two week’s steep correction, investors should expect further downward correction in the local market this week.
The correction on Wall Street last Friday, sparked by slumping oil prices to a fresh five-year low of below US$58 a barrel will spill over to further dampen trading sentiment.
A confirmed breakdown below last week’s 15-month low of 1,730 for the index will threaten the last significant retracement support of 1,716, the 23.6 per cent Fibonacci Retracement (FR) of the 1,660 low of August 28 2013 to the 1,896 record high of July 8 2014.
Another breakdown will challenge better supports at the 1,700 psychological level and 1,684, the August 29 2013 low, before targeting the 1,660 pivot low.
Immediate resistance is revised lower to 1,750, the 38.2 per cent FR matching the falling 10-day moving average level, with stronger resistance at 1,778, the 50 per cent FR level, with 1,806, the 61.8 per cent FR level, as next resistance.
Further selloff in blue chips such as Gamuda, Genting Bhd, Genting Malaysia, Maybank, RHB Capital and TM will be attractive bargains for year-end window-dressing upside.
Aviation stocks AirAsia and Air-Asia X will also attract buyers as they stand to benefit from tumbling crude oil prices, which will reduce operating cost and boost bottom lines.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.