Healthy correction may set in

Plantations stocks are again the champions of the bulls, leading last Friday's breakout rally fuelled by foreign buying triggered by renewed strength in the ringgit and the rally of crude oil to US$100 (RM328) a barrel. The three key plantation heavyweights Sime Darby, IOI Corp and KLK contributed a total gain of 16.1 points or 82 per cent of last week's surge in the benchmark Kuala Lumpur Composite Index (KLCI) to another record high. For the week, the KLCI added 19.63 points, or 1.4 per cent to close at 1,466.67, a new record closing high, with average daily trading volume improving to 743.1 million shares, compared with 665.9 million shares in the previous week, boosted by renewed buying momentum on blue chips last Friday.
I have highlighted last week four important drivers for the KLCI to move towards 1,570 points target in the early part of first half 2008. One of them was commodity play. So far, the plantation stocks have lived up to that expectation and likely to continue to do so with the strong positive correlation between crude palm oil (CPO) and crude oil prices. The fact that Malaysia is blessed with both CPO and hydrocarbon is positive at a time when exports are expected to slowdown.
The high oil prices have raised hopes of higher demand for vegetable oil as feedstock for biofuel, a direct substitute to hydrocarbons, although its economic viability at current prices is debatable. Nevertheless, the bullish outlook for CPO prices are driven by its own sector dynamics as well with heightening fight for acreage between oilseeds and grain, depleting world vegetable oil stocks and anti-export measures undertaken by governments in various countries.
The strong demand, tension in Nigeria and the latest data from the US that showed crude-oil inventories fell 25.1 million barrels to 289.6 million in the past seven weeks are likely to keep oil prices above US$90/barrel (RM295.20) in the near term. Opec is not likely to assuage the situation by agreeing to pump out more crude oil when it meets on Febuary 1 as it is expecting a possible recession in the US to check rising global demand and keep a tight rein on prices.
Further weakening in the US dollar with an expected interest rate cut is another boon for crude oil prices. With latest US December payrolls of 18,000 missing market expectations of 70,000, unemployment rate of five per cent is at its two-year high and the Institute for Supply Management's manufacturing index dropping to its lowest level since April 2003, chances are bright for a 50 basis points cut to 3.75 per cent in Fed's target interest rate when it meets next on January 29 and 30.
So, continue to lookout for bargains in the plantation and oil & gas sectors. Despite the recent run up in prices of plantation stocks, KL Kepong, United Malacca and Boustead Holdings are still worth considering based on their more than 15 percentage capital gain potential from current levels.
Meanwhile, most of the oil & gas stocks are clear laggards in the recent market run up and it will just be a matter of time before any rotational interests come into play. Although not many local service providers have direct exposure to rising oil prices, the sheer need to increase outputs of crude oil and refined products in the future will lead to greater investments in the sector that will be positive for the whole industry. On that score, it is worthwhile to include Petra Perdana, KNM, Petra Energy, Sapura Crest, Scomi Group, Perisai Petroleum and Pantech in the investment portfolio now.
As a conclusion, profit-taking pressures are expected to emerge later on this week, which could stem from externalities. It could arise from worse than expected US trade deficit and previously owned homes sales data for November that will be released this week.
Technical outlook
Lower liners were closed higher last week but buying was very selective, focusing on steel related stocks following the higher revision of ceiling prices for the metal.
The daily slow stochastics indicator for KLCI levelled at the overbought zone after last Friday's sharp rally, but the weekly indicator extended higher following the previous week's buy signal above the neutral mark. The 14-day and 14-week Relative Strength Index (RSI) indicators also extended upwards and closer to the 70-point mark, which will imply overbought momentum when crossed.
Meanwhile, the daily Moving Average Convergence Divergence (MACD) sustained the previous week's buy signal, reinforced by last Friday's rally, while the weekly MACD indicator scaled upwards following last Friday's strong closing. The +DI and -DI lines continued expanding on the back of the previous week's buy signal, with the ADX line on the 14-day Directional Movement Index (DMI) trend indicator now at a reading of 23, suggesting improving trending momentum.
Conclusion
Most technical indicators for the KLCI remained positive following last Friday's rally, save for the daily slow stochastics which is signalling overbought momentum and hence correction potential. Immediate resistance is revised to 1,470 (IR) following the breakout rally above 1,450 last week, backed by resurgent buying momentum which must sustain to aid further gains towards 1,490 (R1) and beyond going forward. Immediate support is revised higher to 1,450 (IS), the bullish breakout point, with the 1,430 (S1) providing stronger support base.
However, the sharp overnight correction on US stocks last Friday, triggered by the weaker-than-expected jobs growth and unemployment data which raised concerns that the US economy will fall into recession, could delay upward momentum for the local market this week. Nevertheless, our view is that a profit-taking correction will be healthy, especially to neutralise short-term overbought momentum caused by late window-dressing gains last year, and encourage investors to bargain at cheaper levels for rebound going forward. We remain bullish on plantation stocks given the strong CPO prices and steel-related stocks seem ready to resume their medium-term uptrend.-www.btimes.com.my
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