For the month of August, major markets in the U.S and Europe displayed a dismal MoM performance as investors weighed the timing and pace of potential reductions in the Fed’s bond purchases as well as the mixed earnings headlines from major corporations. As a result, the Dow Jones Industrial Average (“DJIA”) finished the month on a bearish tone, having lost 689-points (-4.4%) for the month while the European Stoxx 50 Index was dragged down 166-points (-1.7%). Apart from Hang Seng Index which recorded a flat 0.7% decline during the month, the sentiment in South-East Asia was much more negative with Thai’s Stock Exchange Index, Indonesia’s Jakarta Composite Index, and Singapore’s Straits Times Index leading the MoM losses by 9.1%, 9.0% and 6%, respectively. Meanwhile, Malaysia’s FBM KLCI index and Japan's Nikkei 225 Index also succumbed to selling pressures with MoM losses of 2.5% and 2.0%.

FBM KLCI’s August Performance. The FBM KLCI’s August performance has proven our house strategy and study of (i) “Sell-on Strength” (S.O.S) strategy at any level above 1,810; (ii) Q3 is a seasonal weakest quarter, respectively. Volatility rocked the market throughout the month on growing concerns on the tapering of US stimulus measures. The liquidation pressure was later compounded by a combination of other negative factors such as the massive outflows of foreign funds from emerging markets, the depreciation of Asian currencies, particularly India and Indonesia, moderation of growth outlook in China, weaker external trade, weaker commodity prices, e.g. the current low CPO prices, concerns of our own easing fiscal health and lastly by a possible US-led military strike against the Syrian government. All the negative headlines saw the FBMKLCI pounded to a near five-month low of 1,660.39 on Aug-28 intra-day session.

On Our Technical Watch Monthly Review. Due to the destructive impact of net foreign capital outflow of RM2.5b from the domestic market in August, the FBM Small Cap stocks bore the brunt of the brutal sell-off pressure, which saw our majority small cap’s technical tracker succumbing to trigger stop-loss action due to the hefty swings in the share price movements. Out of the 31 technical stock highlights that we made during the month, 2 of them were outright BUY recommendations, while the remaining 29 were NOT RATED.

Tracker Review… The technical landscape in August was filled with high downwards volatility, particularly for the FBM Small Cap index, which declined by 8.5% MoM. However, our protective stop-loss level provided us with limited downside risk from the late heavy selldown pressure. Our realised tracker registered a disappointing 6.00% loss against the FBM KLCI’s losses of 2.5%, MoM. Top losers in our tracker are REDTONE (-7.84%), ALAM (-6.08%), KKB (-5.91%), and AFG (-4.15%). We believe the sharp drop of the FBM Small Cap index in the 4th week of August (-3.3% WoW) has somewhat contributed to the number of majority small-cap stocks in realised losses as most of our stock picks (3 out of 6) was stopped-out during the week. However, on a positive note, we still have two stocks in the black, namely PTARAS (+10.6%), and KOSSAN (+1.9%).

September Technical Strategy. While the rebound from the recent sell-off seems likely in the near term, we are somewhat concerned about whether or not this retracement is sustainable beyond the 1,742 level (14 points north of the current level). The 20-day SMA remains below the 50- and 100-day SMA and the MACD (daily chart) is showing signs of bearish convergence. Furthermore, the chart pattern suggests that the FBM KLCI is likely to face strong resistance from 1,730-1,742. Hence, we would adopt a more cautious strategy should the index come close to 1,742 resistance level. Only a decisive breakout would alleviate our doubts and pave a bullish route towards 1,800.

Source: Kenanga