FBM KLCI show signs of revival for an extended rally ahead

After an initial snag, our Malaysian bourse is showing signs of revival for an extended rally ahead. Therefore, we are keeping our hopes that the benchmark FBM KLCI could plot fresh highs by overcoming its record peak of 1,577 soon.

Saving the best for the last, the key market barometer jumped on Friday to offset earlier losses for a weekly gain of 7.2-point or 0.5%. Finishing marginally weaker through the week were the FBM 70 Index (-0.1%) and the FBM ACE Index (-0.3%). Trading activity picked up to a daily average volume of 824.1m shares valued at RM1.6b, from the 735.3m units worth RM1.4b traded the week before. Malaysia continues to shine as a defensive equity market with a year-to-date return of 2.9%, the best among the eleven regional share indices tracked by us and only one of two that are currently in positive territory (the other being Indonesia, up 0.5% so far this year). Essentially, overseas equities are facing external headwinds which have dragged down their performance lately. This was the case last week when most Asian stock exchanges – such as Hong Kong (-3.2%), China shares listed in Hong Kong (-2.7%) and Singapore (-2.4%) – ended in the red.

Amid the growing worries about a doubtful global economic outlook (particularly in the U.S., China and Japan) and spillover effects arising from the ongoing Europe debt crisis, it will be interesting to hear the views of the U.S. Federal Open Market Committee when the policymakers meet this Tuesday and Wednesday. While the federal funds rate will probably be maintained, the focus is on whether:

1. the timing of any future rate hike will likely come later rather than sooner; and
2. QE2 (the quantitative easing program) will expire in end-Jun as previously stated or a QE3 plan will be hatched.

Meanwhile, it should be a dry week as far as scheduled news flows on the domestic scene is concerned. And the same could be said for trading interest as daily volume is anticipated to come in more or less around 1bn shares just like what it has been in recent weeks. But this does not mean that all will be quiet on our local bourse as window dressing activities may be visible in the run-up to the end of first half of 2011.

From a technical viewpoint, there is a chance for the FBM KLCI – after breaking out from two downward sloping trend lines that stretched back to mid-Jan (see chart overleaf) – to keep the positive momentum going. If so, then we expect the benchmark index to extend its rally (from a recent low of 1,507.64 six weeks ago) and plot higher highs ahead.

On the chart, the benchmark index, which settled at 1,563.43 last Friday, is in a position to test and overcome the immediate resistance level of 1,575 soon. A breakaway from this point could signal more upsides with the FBM KLCI likely to climb above its all-time peak of 1,576.95 (reached in early Jan this year) towards the next resistance target of 1,605.

Should there be any intermittent market pullbacks the first two support lines for the bellwether are seen at 1,550 and 1,530, respectively.