MARKET REVIEW

Shrugging off the overnight 104 pts fall on Dow amid a stream of disappointing US economic data, Asia’s stock markets ended higher. The Shanghai Composite Index rose 1.9% (+4.55% WoW to 2804), given positive US-China trade negotiations progress and both Washington and Beijing have begun drawing up MOUs over trade. Sentiment was also boosted by Trump’s recent statements that the 1 March is not a “magical date,” and that he is ready to extend the deadline to reach an agreement.

Tracking lower Dow overnight, KLCI lost 9.3 pts at 1,721.4 (+32.6 pts WoW) on healthy profit taking last Friday after surging 41.9 pts during the Monday-Thursday sessions.. Sentiment was wary due to the ongoing Feb reporting season and awaiting further the US-China trade discussions details. Market volume decreased to 2.67bn shares worth RM2.34bn compared to Thursday’s 3.71bn shares worth RM3.00bn. Market breadth was negative with 290 gainers as compared to 611 losers.

After hovering between 25,906 (-55 pts) and 26,053 (+202pts), the Dow jumped 181 pts to 26032 to record its 9th straight weekly gains (+0.6 % WoW). The index briefly fell in early sessions after US officials briefed on the negotiations, commenting more time is likely needed for specific steps by Beijing to end forced transfers of US technology, coupled with certain other policies. However, the Dow staged a strong rebound after Trump later said there was a very good chance the US would strike a deal with China to end the trade war and he was inclined to extend his 1 March tariff deadline.

TECHNICAL OUTLOOK: KLCI

On the back of positive breakout above multiple key SMAs and 1706 (YTD high) levels last week, KLCI is currently testing the long-term downtrend line near 1738 (or 200D SMA). A strong close above the said trendline would be positive for the local market towards 1766 (100W SMA) zones. Nevertheless, we opine that the recent rally is slightly stretched following the technical rebound from 1,666 (YTD low) to a high of 1,732 (22 Feb) and could be due for a mild retracement amid overbought slow Stochastic oscillators. Immediate supports are 1706, followed by 1690 (30D SMA).

Dow’s superb 11.6% rally YTD on the back of positive expectations of the US-China trade talk and a dovish Fed should bode well for KLCI to retest immediate resistance at 1,738 levels. However, sentiment would remain cautious as the ongoing 4Q18 earnings season hitting its peak this week. In addition, foreign trade flows have turned negative last week and may limit the upside potential on the key index.

TECHNICAL OUTLOOK: DOW JONES

After notching its 9th straight weekly gains, both RSI and Stochastic oscillators are displaying overbought signals, but the MACD Indicator is still hovering above the zero level. In short, overall technical outlook remains positive as the uptrend is still intact given that the index remains above immediate 10D SMA. However, in the short-term, we believe a minor retracement may happen as the index has not retraced since hitting the trough of 21712 (26 Dec). Should a retracement happen, we expect the index to find support at 25600 (S1) and 25000 (S2). Conversely, a strong buying momentum would spur the index to 26300 (R1) and all-time high at 26952 (R2).

Taking cues from the progressive US-China trade talks and increasingly dovish Fed coupled with Trump’s latest announcemnt on Sunday to delay the U.S. increase in tariffs beyond the 1 March dateline followed by potential meeting later with President Xi at Mar-a-Lago to conclude an agreement, the Dow is envisaged to trend higher in the near term. However, growing worries over the global economy coincide with a deteriorating US 1Q19 earnings outlook (as consensus S&P 500’s EPS growth have shrunk to below -0.5% from around +4-5% at the start of the year) may limit further strong gains as Wall St had enjoyed pretty extraordinary rally since Dec low, reflcted by more and more upside exhaustion signals.

TECHNICAL TRACKER: CLOSED POSITIONS

Last Friday, we had squared off our technical tracker position on TOPGLOVE (+6.1% return) and Our 1Q19 Stockpick on HSL (+15.7% Gains).

Source: Hong Leong Investment Bank Research - 25 Feb 2019