Sell Ahead of Further Weakness in the Medium-Term

The Bursa Malaysia market failed to follow-through on the previous week's strong gains, as increased uncertainties on the domestic political situation and sharp fall in plantation stocks dragged the benchmark Kuala Lumpur Composite Index (KLCI) lower, ignoring a mid-week rally in the US and the region. Week-on-week, the KLCI lost 36.43 points, or 2.9 percent to close at 1,221.98, with trading volume remaining light as most investors continued to stay sidelined given the uncertain outlook.

New spot month April KLCI futures contract traded on Bursa Malaysia Derivatives Bhd dipped 40 points, or 3.2 percent last week to settle at 1,220, reversing to a 2-point discount to the cash index, against the 1.6-point premium on the previous Friday. Profit-taking and selling post first quarter window-dressing caused a correction on the cash market and renewed short selling interest given the increased domestic political uncertainties.

The market began trading last week on a weaker note, as the previous week's gains for five straight days and concerns over potential for profit-taking and selling post 1Q window-dressing discouraged buying. A sharp rally on US stocks after major investment banks succeeded in raising capital to weather the worsening credit crisis lifted stocks in the region mid-week. However, the index only managed an early high of 1,264.75 before falling back, overshadowed by increased domestic political uncertainties following calls from certain quarters for a leadership change in the ruling coalition after the shocking defeat in last months general elections. The KLCI eventually fell to an intra-week low of 1,219.97 by Thursday, and then stabilized amid light bargain hunting which cushioned the index above the immediate chart support of 1,220 ahead of the weekend.

Sector-wise, plantation stocks were sold down significantly, after CPO futures prices tumbled towards the RM3,000 per tonne mark during the trough of a sell-off triggered by sharp limit-down moves on the CBOT US soybeans and soyoil market following a sharp increase in soybean plantings for the coming season. Construction, infrastructure and property related stocks with business operations in opposition controlled states also fell on concerns over potential delay in implementation of the projects by the current federal government.

On momentum indicators for the KLCI, the daily slow stochastics is falling steeply towards the neutral zone following last week's sell signal (Chart 1), but the weekly indicator remained flat at the oversold region. The 14-day and 14-week Relative Strength Index (RSI) indicators weakened further below the neutral mark to suggest further deterioration in sentiment.

Meanwhile, the daily Moving Average Convergence Divergence (MACD) positive signal line following the previous week's buy signal is flattening while the weekly MACD indicator is deteriorating deeper into negative territory, suggesting further medium-term weakness (Chart 2). The ADX line on the 14-day Directional Movement Index (DMI) trend indicator stayed in non-trending mode on contracting -DI and +DI lines, implying an extended consolidation.

Conclusion
Given the evidently weak technical momentum on the KLCI amid cautious sentiment,the Bursa Malaysia stock market should dwindle with a downward bias for high possibility to re-test the psychological 1,200 level. Technically, the falling 30-day SMA will reinforce immediate resistance from 1,250 (IR) with 1,265 (R1), last week's high, acting as next hurdle (Chart 3). Any bear market rally attempts to try and cover the post election gad-down from 1,278 should be viewed as better selling opportunity ahead of further correction ahead. On the downside, a break below 1,200 will fuel further correction towards 1,180, with a breakdown below the recent pivot low of 1,157 to enhance bearish momentum.

As such, while the market this week may stay range bound amid lack of positive leads, this could be a precursor for further falls ahead as technical momentum indicators failed to show improvement. Additionally, lingering uncertainty in the domestic political situation will prevent investors from returning to the market, thereby capping trading liquidity which is sorely needed to sustain a market recovery. Hence, investors should reduce exposure or look to sell on any counter trend rallies ahead of further weakness in the medium-term.