After a stellar end in 2013, global stock markets floundered in the month of January 2014 as uneasiness surrounding the slower Chinese growth and the withdrawal of US monetary stimulus spread from a broad decline in emerging market currencies to major equity markets. For the month, the Dow Jones Industrial Average was down by 5.3%, or a whopping 878 points to record its first monthly loss since August last year. Over in Europe, the Stoxx 50 also lost ground to the tune of 3.1%, as latest data showed an unexpected drop in euro-zone inflation, reigniting speculation that the region is headed for deflation which could derail the economic recovery. However, it was Japan's Nikkei 225 which was among the hardest hit, with its 8.5% MoM plunge, notching its worst month since May 2012.

FBMKLCI’s Performance. Meanwhile, the local benchmark FBMKLCI was down by 62.93 points (3.4%) at 1,804.03, even with the pre-Chinese New Year rally that saw the index rebounding from a low of 1,777.62 just a few days earlier. While January's retreat in large cap blue-chips did not come as a surprise (Note that MoM losses were recorded for 5 years out of 6 years between 2009-2014), the performance of the FBM Small Cap Index was much more disappointing. Poor overall sentiment led to the FBM Small Cap surrendering most of their earlier gains during the first two weeks of the month to finish almost unchanged at 15,696.71 (up by just 2.54 points or ~0.0%).

“On Our Technical Watch” Monthly Review. In line with the strategy highlighted in our last Monthly Technical Review (dated 2-Jan-2014), we adopted a "risk-on" approach on smaller capitalisation stocks when a buy signal was generated as the FBM Small Cap index convincingly broke above the 15,800/850 multi-month resistance at the start of the month. During this time, we initiated two additional positions to our technical tracker (technical BUY calls), namely SUPERMX and ECS after they sported the "Ascending Triangle" and "Channel rebound" patterns, respectively. These came in addition to the existing seven small cap counters which were already in our tracker, such as PIE, ASIAFLE, YOCB, HIAPTEK, ULICORP, LBALUM and WILLOW.

Roller Coaster ride for the small caps. Contrary to the FBMKLCI's poor performance, the FBM Small Cap index managed to stage a decent 600 point (+3.8%) run up at the start of the month to 16,300. Even so, the rally proved short-lived after a string of weak global economic data and poor sentiment dragged down the small caps towards the end of the month. The sharp turn of events left little time for us to react, although we managed to trim our losses on ULICORP (-1.82% marginal loss), as we felt that the stock's technical picture no longer reflected our earlier bullish views. This decision to cut-loss at RM1.08 turned out to be the lesser of two evils, as the stock is now trading much lower at RM1.02. Meanwhile, we also took profit on PIE later in the month for a 14.15% gain which brings the average realised gain to +6.17% for these two stocks, and an unrealised gain of +2.19% for the remaining seven stocks still running in our tracker (compared to the -3.4% MoM return for the FBM KLCI).

Technical strategy for February Following the weak start to the year, the candlestick charting for both the FBM KLCI and FBM Small Cap index suggest that the near-term bias is to the upside. Should the recent pre-CNY rally turn out to be more than just a flash in the pan, the FBMKLCI could extend its upward move and retest the 1,821 resistance (confluence between the 20- and 50-day SMA) over the next few days. That said, resistance is expected to be strong at the aforementioned 1,821 level, and we would prefer to use it as a yardstick to sell into strength rather than to hope for a breakout.

Source: Kenanga