Market review

• Despite Nikkei’s 1.4% surge to six week high amid weaker Yen and rising hopes of further stimulus by BOJ, regional markets mostly ended lower on profit taking pullback after IMF slashed global growth forecast again.

• Tracking lower regional markets, KLCI fell as much as 4.4 pts intraday but selected bargain hunting activities on FBM30 stocks reduced the losses to only 0.2-pt. Market breadth was positive with 424 gainers agaisnt 376 losers, supported by a 11% jump in volume at 1.88bn shares on active buying interests in lower liners and penny stocks.

• Wall St continued to show resilience in light of positive June housing starts and better results from IBM, Johnson & Johnson and Goldman Sachs, with investors resuming a risk-on approach to push Dow (+26 to 18559) to new high for the sixth day in a row and extended its winning streak for the 8th straight sessions. Nevertheless, the rally from Brexit low (+8.3% from 17140) has become over - extended as sentiment was dogged by IMF’s downbeat assessment of global economic outlook and investors are closely assessing the ongoing 2Q16 reporting season as well as the statement from FOMC meeting on 26-27 July.

Technical Insights

• Mild profit taking after post Brexit rally

• Despite ending 0.2-pt lower, the index still managed to close above the 1666 (200-d SMA) levels and confi rmed a “doubl e bottom” formation, which signals a major trend reversal in the short to medium term. Upside targets lie at 1684 (61.8% FR), 1700 (psychological barrier) and 1729 (14 Apr high).

• However, after soaring 3.7% from Brexit low of 1611 (24 June), technical indicators are getting grossly overbought and pointing towards potential profit taking pullback. Immediate support is 1656 (38.2% FR). A decisive fall below 1656 will trigger short term retracement to lower supports at 1645 (30-d SMA) and 1639 (23.6% FR).

Market Strategy

• Despite recent optimism of recent better-than-expected US economic data and results, hopes of more stimulus from central banks and governments and expectations of more mega project roll-outs by Government in the near term, KLCI may witness near term mild profit taking pullback amid IMF pessimistic mode on global economy, oil prices consolidation and stretched technical indicators.

• On local front, the signing of MOU for the High Speed Rail (HSR) may buoy sentiment on construction stocks and property developers that have landbanks nearby the proposed stops, such as Matrix, UEMS and Sunway (details in our separate report on HSR).

Source: Hong Leong Investment Bank Research - 20 Jul 2016