BLUE chips recovered for a second week, boosted by strong economic data from the United States that lifted the benchmark Standard and Poor’s 500 index to a record high last Thursday, amid easing geopolitical tensions as Russia softened its stance over Ukraine.

However, there was keen trading interest focused on penny stocks, which attracted strong trading momentum, pushing daily trading volumes to record highs. The withdrawal of margin financing facilities by a major brokerage on selective penny stocks caused share price volatility to spike mid-week, but trading normalised towards the weekend as downside on penny stocks was cushioned by strong buying momentum.

Week-on-week, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) added 6.68 points, or 0.36 per cent, to 1,870.99, with gains on CIMB Bhd (+20 sen), Tenaga Nasional Bhd (+18 sen), Public Bank (+18 sen), Sapura-

Kencana Petroleum (+12 sen) and UMW Holdings (+58 sen) representing most of the index’s rise.

Average daily traded volume and value last week ballooned to a record 4.53 billion shares and RM2.68 billion, compared with 3.43 billion shares and RM2.38 billion, respectively, the previous week, as trading momentum on penny stocks spiked to record highs mid-week.

The much-anticipated meeting of central bankers in Jackson Hole, Wyoming, last week did not reveal anything new to gauge the timing of hike in US short-term interest rates. Despite the US unemployment rate of 6.2 per cent hovering slightly below the Federal Reserve’s target range of 6.3 per cent to 6.6 per cent, the policymakers are still concerned about the low labour participation rate of 62.9 per cent versus pre-crisis average (2004-2007) of 66.1 per cent, high long-term unemployed share of 32.9 per cent versus pre-crisis 19.1 per cent and weak wage growth. As it is, months of strong US economic data have already shifted consensus expectation for a rate hike sooner than expected in mid-2015.

Although a rate hike would be negative for US equities, any initial knee-jerk reaction can be neutralised if there are signs of acceleration in the economy that could lead to more private sector investments, job growth and improved consumption.

Hopefully, any drastic monetary measures to revive the stalling European economy from the European Central Bank in its next meeting on September 4 can provide some follow-through upside momentum for emerging markets. Nonetheless, take note that the writing is already on the wall for a shakeout, probably by early next year, when the hot money flows back.

As far as the FBM KLCI is concerned, any advancement in the index could be mitigated by sustained selling pressure in plantation stocks, dampened further by news of bumper harvest prospects for corn and soyabean in the US, after easing signs of El Nino and negative news flows from Indonesia affected share prices earlier.

There is little domestic catalyst to propel the benchmark index higher in the immediate term with second-quarter results season so far failing to create any excitement. As such, be critical in your stock selection by keeping a close eye on valuation and earnings growth prospects. Avoid speculative plays that are riding high on the pretext of turning into a growth stock, if scarce details are available and the business model is not convincing.

That aside, news flows, especially with regards to contract awards in the oil and gas (O&G) and construction sectors, could gain momentum and contribute to further revival in the index as we approach 2015 Budget announcement in October.

Technical Outlook

Blue chips on Bursa Malaysia snapped a five-day winning streak the previous week and eased into profit-taking consolidation last Monday, but small caps and penny stocks stayed buoyant on active rotational trading interest. The FBM KLCI slid 2.56 points to settle at 1,861.75, off an early low of 1,859.46 and high of 1,864.20, as gainers edged losers 454 to 437 on robust turnover of 3.58 billion shares worth RM2.47 billion.

Stocks bounced back strongly the next day, boosted by strong US homebuilder confidence, which climbed to a seven-month high, and easing geopolitical tensions after Russia conceded for political solution over weekend talks with top European ministers. The index climbed 10.41 points to close at the day’s high of 1,872.16, off an opening low of 1,862.49, as gainers led losers 456 to 439 on record high trading volume of 5.11 billion shares worth RM2.91 billion.

Shares nudged higher on cautious trade last Wednesday, in tandem with most regional markets as traders await the Fed’s annual meeting for clues on their easy money policy, but small caps and penny stocks attracted keen profit-taking interest. The FBM KLCI added 6.73 points to close at the day’s high of 1,878.89, off an opening low of 1,872.59, with losers thumping gainers 758 to 227 on another record high trading volume of 7.66 billion shares worth RM3.3 billion. Blue chips eased the following day, in line with softer regional markets after the HSBC preliminary reading of China’s purchasing managers’ index fell to three-month low in August, while small-cap stocks bounced back on rotational buying interest.

The key index slid 4.08 points to end at 1,874.81, off an early high of 1,879.62 and low of 1,871.36, as gainers led losers 457 to 393 on modest turnover of 2.98 bil-lion shares worth RM2.44 billion.

Stocks slipped into profit-taking consolidation on Friday, with downside on small caps and penny stocks cushioned by strong buying momentum, while investors await the conclusion of the Jackson Hole meeting of global central bankers over the weekend. The index shed another 3.82 points to close at 1,870.99, off an early high of 1,878.87 and low of 1,869.27, as losers edged gainers 456 to 381 on robust total turnover of 3.31 billion shares worth RM2.26 billion.

Trading range for the local blue-chip benchmark index dwindled to 19.43 points last week, compared with the 23.98-point range the previous week, as blue chips slipped into profit-taking consolidation. The FBM-Emas Index rose 23.91 points, or 0.18 per cent, last week to 13,082.26, but the FBM Small Cap Index shed 160.7 points, or 0.84 per cent, to 19,067.22, as small cap and penny stocks suffered profit-taking correction.

The daily slow stochastic momentum indicator for the FBM

KLCI had climbed to overbought area following last week’s recovery, but the weekly indicator’s signal line hooked up further and is poised to trigger a buy on further strength. The 14-day Relative Strength Index (RSI) indicator retraced to a weaker reading of 50.86, but the 14-week RSI improved to a more positive reading at 54.83 as of last Friday. Meanwhile, on trend indicators, the daily Moving Average Convergence Divergence (MACD) registered bullish expansion after flashing a buy signal early last week, while the weekly MACD signal line continued to indicate slowing downward momentum. The 14-day Directional Movement Index (DMI) trend indicator stayed positive, with +DI and -DI lines retaining uptrend reading.

Conclusion

Despite improved technical readings on momentum and trend indicators for the FBM KLCI, there should be some downside bias for the coming week following the recent two-week recovery. Blue chips should remain in the background on weak trading interest, while small cap and penny stocks continue to attract robust trading momentum and retail participation. The strong participation of proprietary day traders in actively traded penny stocks would continue to boost daily trading volumes to record highs.

As for the index, immediate upside is seen capped by the upper Bollinger band now at 1,888, while next upside hurdle will be the 1,900 psychological level. Immediate support is expected at 1,870, the 100-day moving average level, with better supports available at 1,867, the mid Bollinger band, and the 10-day moving average level at 1,864. The crucial uptrend support stays at 1,845, the current 200-day moving average level.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell. -NST