For the month of July, major markets in the U.S and Europe displayed a stronger MoM recovery supported by encouraging economic data in the U.S. and the generally positive corporate earnings seasons which lifted sentiment. As a result, the Dow Jones Industrial Average finished the month on a bullish tone, buoyed by the 590-points gain (+4.0%) for the month while the European Stoxx 50 index rose 166-points (+6.4%) gain. Apart from Hang Seng index which recorded 1080-points (5.2%) gain during the month, the sentiment in Asia was somewhat less sanguine with Malaysia’s FBM KLCI index and Japan's Nikkei 225 index succumbing to selling pressures with marginal losses of -0.05% and -0.07% despite advancing during the earlier part of June.

FBM KLCI’s July Performance. On the local front, the FBM KLCI underwent a “rollercoaster” trading month with the benchmark index climbing to a fresh record high at 1,810 only to surrender its gains in the final week. As at 31-July, the FBM KLCI was 0.05% lower MoM at 1772.62, with banking stocks leading the decline. We view the price retracement as a healthy technical pullback for the benchmark index. This is in line with our strategy, which advocates a “Sell-on-Strength” (S.O.S.) strategy at any level above 1,810. To recap, 1,810 is our year-end index target and 1,850 is our 12-month target. Towards the end of the month, profit-taking emerged following the announcement that Fitch Ratings was downgrading Malaysia public finance outlook from “stable” to “negative” on 30^th July, which triggered a 22.46-point sell-off (1.25% loss) in a single day.On

Our Technical Watch Monthly Review. The downbeat revision of Malaysia’s outlook by Fitch Ratings added additional negative pressure to the already weak seasonal 3Q. Consequently, the FBM Small Cap stocks bore the brunt of the recent sell-down pressure, which saw our majority small cap’s technical tracker succumbing to profit taking activities due to the large swings in share price movements. Out of the 29 technical stock highlights that we made during the month, 6 of them were outright BUY recommendations, while the remaining 23 were NOT RATED.

Tracker Review… The technical landscape in July was filled with false or failed technical signals and a lack of follow-through buying support in many stocks. Although our protective stop-loss levels provided some buffer, our realised tracker registered a disappointing 6.84% loss against the FBM KLCI’s marginal losses of 0.05%, MoM. Top losers in our tracker are KPS (-10.58%), GOB (-5.99%), and DIALOG (-3.95%). We believe the weakening of the FBM Small Cap index in the 3 rd and 4th week of July somewhat contributed to the weight of  realised losses as most of our calls (5 of total 6) were made during the period, which has turned against our earlier expectations. However, on a positive note, we still have four stocks in the black or unchanged, namely REDTONE (+7.19%), AFG (+5.93%), PTARAS (+5.91%) and ALAM (+0.00%).

August Technical Strategy. Technically speaking, the 1,766 level has become a crucial support level for the FBM KLCI index in August. Failing which, we could see further bearish action towards 1,740 and possibly 1,723 next. Bullish investors should mind a strong overhead resistance located at 1,788 level followed by the psychological 1,800. Going forward, although the FBM KLCI index’s technical picture has yet to provide any pointers on the short-term direction, we suspect that any weakness in the market could potentially offer yet another cheap entry into small-to-mid cap stocks with the caveat that the long-term uptrend remains intact. 

Source: Kenanga