Market review

• Asian markets ended mixed after hawkish comments from two Fed officials, signaling that the US economy is strong enough and could potentially raise interest rates as soon as the 20-21 Sep FOMC meeting.

• Tracking regional markets, KLCI retreated 5.6 pts to 1694 after recording gains in the last five sessions. Market breadth was negative with 323 gainers as compared to 517 losers. Trading volume soared 10% to 3.12bn shares but value declined 15% to RM2.09bn as broader market interests were focused on lower liners and penny stocks while blue chips consolidate.

• Extending 16 Aug decline, the Dow dropped as much as 83 pts in the early session after the hawkish comments by the New York Fed President William Dudley (voting member) and Atlanta Fed chief Dennis Lockhart (nonvoting member). However, the index reversed and inched up 22 pts to end at 18574 after minutes of the Fed’s July FOMC minutes suggest a very go-slow approach for the next rate hike.

Technical Insights

• Index may experience a mild pullback

• After stagi ng a sharp rebound from Brexit’s low of 1611 to as high as 1700 on 16 Aug, KLCI daily and weekly slow stochastic indicators have turned increasingly overbought, which could signal potential profit taking pullback in the coming days. Key supports are 1684 (61.8%) and 1675 (resistance-turned-support of 19 July high).

• However, we only expect a mild consolidation amid the bullish weekly MACD and RSI indicators. We remain positive that the index will break the 1700 decisively after a brief consolidation to test 1716 (100-w SMA), 1729 (YTD high) and 1739 (LT objective) in the long term.

Market Strategy

• We expect KLCI to engage in a mild consolidation amid toppish KLCI daily and weekly slow stochastic indicators. Sentiment may turn more cautious as we embrace a flurry of big caps results in the next two weeks during the Aug reporting season.

• However, any pullback will be well absorbed in anticipation of more stimulus-driven and accommodative policy measures by key central banks and government, the return of higher yield seeking funds into emerging markets and rebound in the “Twin” crude oil and palm oil prices coupled with stabilizing Ringgit.

• Portfolio (FIG5). Yesterday, we had closed our position on IFCAMSC (8.5% gains) after share prices hit above our envisaged R1 upside target.

Source: Hong Leong Investment Bank Research - 18 Aug 2016