Lead Story: Profit-taking to emerge ahead of CNY

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THE benchmark FBM KLCI has rebounded from a low of 1,673.94 points in mid-December to above the 1,800-point level after the sharp selldown sparked by the meltdown in crude oil prices.

This has prompted investors to wonder if the local bourse will be able to keep the upward momentum going and stage a so-called Chinese New Year rally.

Analysts, however, believe chances of such a rally would not be high considering the lingering concerns over the low crude oil prices and weakening ringgit, as well as other factors on the global economic front.

This year, Chinese New Year will fall on Feb 19.

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Based on historical trends, JF Apex Securities observes that the FBM KLCI has moved higher every year prior to Chinese New Year, before declining just weeks before the festival. This happened in 10 out of the 15 years since 2000, showing a 66.7% correlation.

JF Apex research analyst Lee Cherng Wee says the market tends to ride the positive momentum that spills over from the year-end window dressing in December.
He adds that over the past 15 years, the FBM KLCI has been positive, with an average gain of 4.8% from January until its peak before the lunar new year.

The year 2000, when the pre-Chinese New Year rally saw the FBM KLCI leap nearly 18%, and 2007 when the index climbed 15%, were among those that recorded a strong surge, Cherng Wee points out.

The upward trend was followed by profit-taking, which dragged the index down 2.2% on average, he says. “In 2008, the pre-Chinese New Year selldown saw the index slump 6.6%, while in 2009, the index dropped 5.9% on profit-taking.”

The weak performance has historically been due to the timing rather than superstitious reasons, Cherng Wee tells The Edge in an email. “Our market is dominated by institutional funds that are less superstitious than retail investors. It’s just that Chinese New Year falls in late January or early February.”

For this year, the Year of the Goat, most analysts believe the historical trend will repeat itself due to the prolonged cautious sentiment.

“Yes, there will be some profit-taking this year,” Maybank Investment Bank Research regional chartist Lee Cheng Hooi tells The Edge via email. He says the ringgit’s weakness against the US dollar and the volatile crude oil prices are unfavourable factors that will lead to the expected weak performance.

Hong Leong Investment Bank Research analyst Nick Foo Mun Pang also expects investors to take profit and cash out of the stock market before the holiday.

While MIDF Research head of equity research Syed Muhammed Kifni is not denying that the FBM KLCI will see a weak performance, he does not foresee the index suffering any “major pullbacks” that may go beyond its “usual short-term cyclical bounds”.

Kifni, however, agrees that the local bourse’s performance is “materially dependent” on the future performance of the ringgit and crude oil prices. “The market has already priced in the weak ringgit and lower crude oil prices. Otherwise, we may be trading in the 1,900-point range,” he replies through email.

Cherng Wee says the market direction hinges on external factors such as crude oil prices and global economic growth. The lower crude oil prices and revised Budget 2015 raise concerns of a downgrade in Malaysia’s sovereign debt rating by credit rating agencies, he adds.

“This may be bad for the market, both the FBM KLCI and the broader market,” he says.

As for the broader market, many are also not optimistic.

According to Maybank’s Cheng Hooi, the broader market may remain lacklustre “with half the stocks on the exchange active and the other half quiet or untraded”.
Hong Leong IB’s Foo says volatility in the US and China could further dampen the performance of the local bourse.

These may stem from upcoming data releases such as the US ISM non-manufacturing composite, change in non-farm payrolls and unemployment rate as well as the China Consumer Price Index, he points out.

Despite the significantly lower price of crude oil, Kifni says some semblance of a bottoming crude oil market will be positive for the broader market sentiment. This may translate into a greater appetite for risk among investors, he adds.

“While it may be too early to say, it seems that crude oil prices have found a rather good support at the US$45 to US$50 per barrel range,” he says.

Cherng Wee notes in a report that the FBM KLCI had fallen 1.2% to 1,782.18 points as at Jan 29 from the highest close of 1,803.17 points before Chinese New Year.

He says if the 200-day moving average of around 1,830 points is broken, there will be a positive trend for the FBM KLCI going forward. “If the bourse fails to breach the 200-day moving average, then the downward trend since July will continue.”

Foo agrees, saying that the FBM KLCI is facing stiff resistance near 1,830 points. According to him, the market is likely to remain choppy ahead of Chinese New Year.

“Our strategy is to buy on weakness on stocks that are trending upwards and sell into strength,” he remarks.

Cheng Hooi, meanwhile, advises investors to invest or trade for the short term leading up to Chinese New Year.
 

This article first appeared in The Edge Malaysia Weekly, on February 9-15, 2015.