A 2011 correction in the making

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BEARISH. That’s the general sentiment in the local market despite stocks moving into technically oversold levels in the short term. The market fell more than we expected for this week as global markets sentiment were bearish. The benchmark FBM KLCI declined 2% in a week to 1,796.38 points yesterday, below the anticipated support level at 1,820 points. There were no clear signs throughout the week except for a mild rebound last Thursday. The national budget clearly did not provide any catalyst for the equity markets. The ringgit slightly weakened against the US dollar and this added more fuel to the bearish sentiment.

Average daily trading volume was firm at 2.1 billion shares in the past week as compared with the previous week. The average daily trading value rose to RM2.1 billion from RM1.9 billion. This indicates that the trading volume is biased towards higher-priced stocks. The total market valuation fell RM43 billion from last week to RM1,706 billion yesterday.

Selling pressure came from local institutions this time as selling pressure from foreign institutions eased after the ringgit gained some support. Net buying from local institutions last week (last Tuesday to last Friday) was RM121 million. Foreign institutions net selling was RM112 million while retail net selling was RM9 million.

In the FBM KLCI, only six out of the 30 counters closed marginally higher in a week. Gainers were led by Genting Malaysia Bhd (+2.2%), British American Tobacco (M) Bhd (+0.9%) and RHB Capital Bhd (+0.7%) while decliners in the index were led by Felda Global Ventures Holdings Bhd (-6.9%), SapuraKencana Petroleum Bhd (-6.7%) and CIMB Group Holdings Bhd (-6.5%).

Global markets including the Asian region were bearish. Singapore’s Straits Times Index declined 1.6% in a week at 3,194.40 points, the lowest in six months. The Hang Seng Index rebounded last week after a sell-off before the holidays caused by the ongoing pro-democracy protest. The Hang Seng Index, which rebounded 2.1% last week, fell 1.6% in a week to 23,047.97 points. China’s Shanghai Stock Exchange Composite declined 1% in a week to 2,359.48 points and Japan’s Nikkei 225 plunged 5.3% in a week to 14,936.51 points.

Western markets were bearish as well as investors were concerned about the economic growth as governments are now contemplating tapering money supply. On Monday, the US Dow Jones Industrial Average fell 3.9% in a week to 16,321.07 points. London’s FTSE100 Index declined 3% in a week to 6,366.24 points after rebounding from the lowest level in a year last Friday. Germany’s DAX fell 4.3%, also to near one-year lows, at 8,814.43 points. The US Dollar Index declined to 85.72 points from 86.04 points last week.

Gold prices rebounded on bearish equity markets and a weaker US dollar. Commodity Exchange or COMEX gold rose 2.4% in a week to US$1,237.30 (RM4,043) an ounce. Crude oil continued its bearish trend on global glut and declined 6.1% to  US$84.97 per barrel. Crude palm oil (CPO) stayed pulled back for a correction as the ringgit stayed firm. CPO futures in Bursa Malaysia remained in a correction mode, falling only 0.6% in a week to RM2,180 per tonne. The ringgit slightly weakened against the greenback at RM3.27 to a US dollar compared with RM3.26 a week ago.

The market continued to stay in its bearish mode. The selling pressure remained as the volume was firm but the index was declining. Technically, the FBM KLCI is strongly bearish as the short-term 30-day moving average has fallen below the long-term 200-day moving average. The last time this happened was in 2011 where the index fell 16% in two months from the then historical high. So far, the index has fallen only about 5% from the historical high, and 16% from the current historical high is roughly at about 1,600 points.

Momentum indicators like the RSI and Momentum Oscillator continue to indicate strong bearish momentum, similar to the decline in 2011. Furthermore, the FBM KLCI continues to trade below the bottom band of the Bollinger Bands and this indicates strong bearish momentum. We may expect some technical rebounds because of the market being oversold in the short term but these may be dead cat bounces as the market is still bearish.

If history does repeat itself, then we may expect a year 2011-like correction. With the current pullback, there is still room for the index to fall lower. The next technical support level would be at 1,750 points based on a 50% Fibonacci retracement level of the uptrend that began in early 2013 and a 23.6% Fibonacci retracement from the uptrend that began in late 2011. We could expect the index to trend lower unless there is a strong rebound, and that is if the index is able to climb above the 1,820 points support-turned-resistance level.

 

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Benny Lee is chief market strategist for Jupiter Securities Sdn Bhd. Jupiter Securities is a participating broker in Bursa Malaysia committed to offering the best services to a wide range of customers. He can be contacted at [email protected]. The views expressed in the article are the opinions of the writer and should not be construed as investment advice. Please exercise your own judgement or seek professional advice for your investment decisions.

This article first appeared in The Edge Financial Daily, on October 15, 2014.