What's NEXT For Market as at 06 Jan 2014 ..

Index linked stocks and blue chips may continue to rule the market on Monday (06 Jan 2014) if they are still considered as overbought due to their rise over the past month (Dec 2013) on window dressing activities.

The fell of the local market (27 Dec 2013 – 03 Jan 20014) was in line with most regional markets which were consolidating after rising to their highs in recent weeks on more positive global economic data.

But in addition to these two factors, the local market sentiment may be hit if senior government politicians and their followers heed UMNO Selangor's proposal to demonstrate outside Catholic churches during their prayers on Sunday (05 Jan 2014) as this may stir up unwarranted religious tension in Malaysia.

The KLCI was expected to go into range bound profit taking ahead of the upcoming CNY after breaching the 1850 support, dampened by slow manufacturing data from China, regional currency concerns.

Despite the weakness there is no technical evidence of a serious downleg.

Though Bursa may fall further due to global risk aversion, investors can consider accumulating more on weakness as the bulls would start charging again soon, riding on the January effect when fund managers usually start building up their portfolios.

Investors are advice to look at loner term. Using a classical 10 year secular bull market theory (the bulls are getting stronger on the last five years prior to 2014 as momentum rise), 2014 should represent the sixth year of Bursa bull market which means investors could be looking at very strong gains years ahead after a temporary sideways consolidation (as seen in KLSE 1987 – 1992 before the roaring bulls occur in 1993. 1994 and 1995).

Technically as long as the KLCI stayed above the six year uptrendline (using the low of 2009, 2011 and 2013) near 1750 level, the secular bull market could be expected to continue.

Based on the daily chart, the FBM KLCI had now (06 Jan 2014) fallen below the immediate 14-day simple moving average (SMA) and the 21-day SMA, but the bull run that started at the tail-end of the collapsed of Lehman Brothers and the subprime crisis in October 2008 at the 801.27 points level, still is constructive.

The index will consolidate below its resistance of 1840 to neutralize the overbought gains after falling 43 points from the new record high of 1882 level.

The KLCI will re challenge the 1882 resistance level once profit taking is fully absorbed.

Initial support is seen at the 50-day SMA of 1,820, followed by the 1,800 points. A crack of the lower 100-day SMA of 1,792 points would see the 200-day SMA of 1,769 points and the 1,747-1,750 points band becoming vulnerable.

A breach of the 1,882.20-point barrier would open the gate for the bulls to explore unknown territory.

Potential headwinds for the market include gradual withdrawal of foreign liquidity pursuant to the commencement of QE3 tapering as well as Malaysia’s weak albeit improving current account situation may put a cap to the prevailing above mean market valuation going forward.

Going Into 2014 …

The global economic outlook is improving with the US economy showing good signs of recovery.

The improving global economy has given the US Fed enough confidence to start reducing its asset purchase programme with effect from Jan 2014.

Meanwhile investors should start looking at export oriented industries and companies that are poised to beneficiaries of the recovering global economy.

Despite that, the overall view of the Malaysian market in 2014 will be a volatile journey.

Firsts half of 2014 will be cautious mainly on concerns over the impact of US QE tapering. QE tapering may have a negative impact on the Malaysian bond market which may result in weakness in the ringgit.
Equities with high foreign shareholdings may also be negatively affected.

Other short term headwinds will be the continuation of subsidy rationalization and credit tightening which may impact domestic consumption growth and the full impact of BNM Malaysia’s measures to cool personal and property borrowings.

Inflation will remain elevated through to 2015 with further subsidy rationalization and the implementation of GST in April 2015.

Second half of 2014 is more positive. Expect corporate earnings growth to drive better market performance in the second half 2014.

For the emerging markets, 2014 could be an important year for many emerging markets, establishing trends that could play out through much of the remainder of the decade.

The Chinese government initiatives announced in late 2013 could have far reaching significance. The proposed changes intended to facilitate sustainable economic growth in China.

A number of major emerging markets will see major elections in 2014 – Indonesia, South Africa, Thailand and India in the first six months of 2014. As the electoral cycle peaks, the administrations may feel more able to address barriers to long term growth and retreat from populist measures.