Market should remain solid (ext: Edge)

Asian markets retreated on July 29, rattled by a 5% pullback of the Shanghai Composite Index on reports that China’s two biggest state-owned commercial banks were restricting their lending.

Analysts said the local market should remain solid and defensive today after the minor correction on July 29 due to some profit-taking by smaller institutions, but upside potential may be limited.

Maybank Investment Bank (Maybank IB) head of retail research and chief chartist Lee Cheng Hooi said there was not likely to be intense buying at the start of trading as the market had already seen a slight rebound.

“The technical rebound happened within intra-day trading on July 29,” he said. “What happened was some profit-taking action by the smaller guns, but the trend remained intact. Valuations have run ahead of fundamentals a fair bit.”

Lee said initial indicators showed that the effect of the tightening of credit in China seemed to have been confined to the Chinese bourses, with its closest neighbour, the Hong Kong stock exchange, taking only a slightly greater knock than the rest of the region.

The FBM KLCI’s fall did not break through support levels, Lee said. “The local rally is probably being led by local funds otherwise the reaction (to the China news) would be more drastic.” The local market would track the US close in overnight trade, he said.

 “The FBM KLCI’s daily signals have elements of bearish divergence indicating waning upside potential.” He said the key index’s rise from its October 2008 low was still a corrective “pseudo bull-run” pattern.

“In layman’s terms, this means that when the current liquidity (that is fuelling this current run-up from its March 2009 low of 836.51) dries up, the market could head downwards,” Lee said. The report concluded that the FBM KLCI was on a firm uptrend towards 1,237.25 and 1,248.34.

“At this resistance and retracement zone cluster, we believe that liquidity would dry up and profit-taking would take place, in accordance with past evidence of the 1981 and 1994 price modus operandi.

“A bullish tone is obvious but a higher degree of investor caution is wise at the levels we suggest,” he said.

Jupiter Securities Sdn Bhd head of research Pong Teng Siew said the decline in equities was a timely reminder to investors that the current rally could end anytime, as valuations were now stretched.

However, he said the dip in the local market on July 29 was a minor “crack in the rally and not sufficient to fracture investor confidence”, adding there was still plenty of liquidity to support the market.