As the dust begins to settle in the aftermath of the global equities sell-off, it appears that further downside risk for our Malaysian bourse remains probable. In the absence of any concrete interventions from policymakers to reverse the falling momentum, there is a possibility the benchmark FBM KLCI ' beyond an intermittent technical rebound ' could resume its slide going forward.

The key market barometer fell for the fifth straight week, down 40.8-point or 2.7% to end at 1,483.67 last Friday. Taking a hit too were the FBM 70 Index and the FBM ACE Index with a weekly loss of 4.0% and 6.3%, respectively. Selling activity was brisk as daily average trading rose to 1.6b shares in volume and RM2.9b in value, up from 1.2b units worth RM2.0b in the previous week. A sea of red was visible everywhere else too as share prices got sucked into a freefall. Across the region, plummeting the most through the week were China shares listed in Hong Kong (-8.6%), Korea (-7.7%) and Hong Kong (-6.3%) while major U.S. bellwethers posted weekly losses of between 1.0% and 1.7% amid volatile trading.

We may be stuck in a vicious circle. A sovereign credit rating downgrade ' in anticipation of deteriorating economic and financial conditions in the U.S. ' has scared investors whose fears then triggered panic selling worldwide, which in turn has put the global economy on even shakier grounds now. As these forces feed on and reinforce one another, market sentiment and economic confidence could remain under considerable pressures. Until this self-perpetuating process is halted, the bearish momentum may persist. So far, the few initiatives taken have not been effective. For example, the U.S. Federal Reserve's vow to keep interest rates low through mid-2013 while contemplating fresh economic stimulus tools, together with the European Central Bank's move to purchase sovereign bonds, have failed to give a fillip to the financial markets. As confidence is paramount to a sustained recovery, more concrete and coordinated actions from the policymakers are needed to calm the chaotic markets. Sitting back and doing nothing may no longer be an option should the downward spiral persist.

Still on the economy, it remains to be seen what would be the future implications from the U.S. and Europe fallouts on Asia including Malaysia. While it takes time for any effect to be felt, we will get to make an early assessment when the 2Q11 Gross Domestic Product (GDP) report is release on Wednesday. Meanwhile, the corporate earnings season is expected to gather pace as listed companies like AMMB (on Monday), WCT (Tuesday), MISC (Thursday) and Hong Leong Bank (possibly sometime this week) are scheduled to announce their Apr ' Jun quarterly financial results.

On the chart, the FBM KLCI technical outlook appears vulnerable. While a short-term rebound from an oversold territory is due anytime soon following a sharp drop of 111.1-point or 7.0% over the past five weeks, the benchmark index's immediate upside could be capped by patchy buying momentum. With no trend reversal in sight yet, beyond the intermediate bounce-up, there is a possibility that the bellwether may sink deeper ahead. If so, then we will count on 1,308 ' based on the Fibonacci percentage retracement rule of 38%, as measured from the start of the bull run in mid-Mar 2009 through the mid-Jul 2011's peak ' to act as the major support line.

In the short run, as our local bourse will probably swing broadly sideways, we expect the FBM KLCI to run into resistance at the 1,495 and 1,530 levels. On the downside, the first two support levels are currently set at 1,465 and 1,435, respectively.

Report from HWangDBS