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Sunday, October 3, 2010

Weekly Market Preview 04 October 2010

From the Chartroom

It ain’t over until it is over as our bullish stock market trend remains intact. In fact, we will only know where exactly the top will be on hindsight. So, with the momentum still riding high, our Malaysian bourse could scale greater heights in 4Q10. We consequently raise our technical target for the benchmark FBM KLCI to peak somewhere inside the 1,525-1,565 range, after reaching our initial forecast of 1,410-1,480 set at the beginning of this year.

3Q10 turned out to be the most profitable quarter so far this year. The FBM KLCI advanced 11.4% (versus +3.8% in 1Q and –0.5% in 2Q) to lift the year-to-date return to +15.0%, the fourth highest among the 11 Asian stock exchanges tracked by us. The big winners across the region were led by Indonesia (up 38.2% so far this year), Philippines (+34.3%) and Thailand (+32.8%) while the worst underperformers were Japan (- 11.2%), China shares listed in Hong Kong (-3.0%) and Taiwan (+0.6%). Meanwhile, key U.S. indices on Wall Street were marginally in the black (up between 2.3% and 4.4%) after nine months.

Quite evidently, foreign funds inflows have been the force behind our stock market rally. They were net buyers for four straight months since Jun, after adding a net amount of RM4.3b worth of Malaysia shares in Sep (more than the RM2.9b registered in Aug). For the whole third quarter, their net buying worked out to be RM9.5b (significantly more than the RM0.8b of net buying in 2Q10). In contrast, turning net sellers in 3Q10 were both the local institutions (minus RM8.1b vs. a positive RM1.2b in 2Q10) and local retail investors (minus RM1.0b vs. 2Q10’s minus RM1.2b).

A steady pipeline of news flows is in the works to push our local bourse even higher on rotational themes as we enter the last quarter of 2010. The line-up of events include:
  1. Action plans and policy liberalisations to boost the economic fundamentals when the Government announces the Budget 2011 (on 15 Oct) and the New Economic Model Part 2 (on 26 Oct). This could further strengthen the Ringgit, thus attracting more overseas funds to park their money in the country;
  2. New listings of big-cap companies, namely Malaysia Marine & Heavy Engineering Holdings (end-Oct) and Petronas Chemicals Group (by Dec), as well as probable sell-down of shareholdings in government-linked companies, both of which should whet investors’ appetite; and
  3. The progress of individual mega projects such as the MRT and LRT transportation networks, privatization of government land parcels for property developments etc. But this is not to say that there is no downside risk. Lingering in the horizon are clouds of adverse external developments.
Possible pitfalls that could derail the global equities from their upward trajectory include:
  1. a double-dip recession threat;
  2. spreading of sovereign debt crisis;
  3. wild swings in the currency markets;
  4. unstable commodity markets; and
  5. sudden withdrawals or contractions of liquidity around the world.

On the chart, our in-built trading strategy – a tool that generates buy signals based on predetermined conditions – has been tested and proven to be dependable thus far. Recall that this trading system is run on an embedded program that combines selected technical indicators and filters, with its reliability and validity back-tested using statistical technique. The decision rule says that the index would have to jump at least 10% to be counted as one profitable trade, or else it would be considered a false trigger if it slides 10% or more, whichever comes first, measured from the signal point.

In our 3Q10 quarterly technical write-up dated 28 Jun, we highlighted then the appearance of outstanding buy signals from No 47 to No 50, which implies that the FBM KLCI would at least ascend to between 1,377 and 1,418, should they eventually pass our trading rule by a markup of 10%. These goals were subsequently surpassed when the benchmark index hit a high of 1,479.59 on 17 Sep. With this, a total of 42 of the 50 buy signals (or an accuracy rate of 84%) that popped out between 2000 and 2010 has now satisfied our investment criteria, thus enhancing the predictability power of our trading system. While no new alert has emerged since buy signal No 50, our current readings of other technical indicators/chart patterns are telling us that more upside could be in store for our stock market.

Report from
HWANGDBS Vickers Research Sdn Bhd (128540 U)

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