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Thursday, November 3, 2011

Banking Sector - Weak Rebound Thus Far (OSK)

The broad market has made a respectable rebound since reaching a low on 26 Sept. The benchmark FBM KLCI managed to regain slightly more than 62% of the July-September decline, which is a respectable feat given the extent of the drop. Banking stocks also rebounded in tandem given their high weighting in the benchmark index. But many may not notice the relatively weak rebound of banking stocks compared to that of the benchmark. Therefore, an improvement in the relative strength of banking stocks is paramount for a sustained rebound for the FBM KLCI. In this report, we identify the banking stocks which may lead the market on its recovery path and vice versa.

Maybank: A relapse. Maybank showed much promise at the early phase of decline that started in July. The stock was able to hold above the 10-month support level at RM8.40, which translates into outperformance in its relative strength line of August-September. However, its performance deteriorated after breaking below the support level, as shown by the downward sloping relative strength line for the whole of October. A break below the one-year support level could see the continuation of the underperformance of this stock. The price trend is similarly weak although not as pronounced as its relative strength line. The series of lower highs since April is unbroken and a close below RM8.20 should see the continuation of the price weakness. Strong support is expected at RM7.50, the 52-week’s lowest close, above which a break should see the test of the May 2010 low of RM7.00.

CIMB: Weakest of them all. CIMB is one of the stocks that are hit hardest since the broad market sell-off began in July. The failed test of the all-time high heralded the start of a reversal in its market outperformance since early-2009. Its relative strength line even broke below the March low. Despite having made a short-term higher high since 26 Sept and trading above the 50-day MAV line, the stock’s relative strength has stayed flat and well below the broken support. The October price retracement was also weak as it clawed back only 38% of the July-September decline at RM7.50. A close below the two-week low of RM7.15, also a Fibonacci retracement of the July-September decline and where the 50-day MAV lies, should see a return in selling and a possible continuation of its underperformance. Watch out for the share price to test the recent low of around RM6.50 and if violated, the stock may trade at as low as RM6.00, which is the low of February 2010. However, another break above RM7.50 may see a return of its outperformance, provided that its relative strength line breaks above the broken March support.

Public Bank: Relative strength line on uptrend. Similar to Maybank, Public Bank managed to stave off the early selling pressure of July/August. But that took a turn after the stock broke the February-low and the subsequent rebound off the 26 September low underperformed the benchmark. This is not too different from the relative strength performance from January-July. One marked difference is that the relative strength peak in September was higher than that of January, indicating a possible uptrend should the relative strength line make a higher low. This displays the stock’s more defensive nature versus the other two big-cap banks, and the possibility of a faster recovery once the broad market downtrend ends. The price trend is, nonetheless, weak judging from the lower lows since January, and a close back below RM12.50 should see a continuation of the downward movement, with support expected near the recent low of RM11.50. But watch out for a return in buying as the stock may lead the sector on a price uptrend.

AFG: Strongest of them all. The stock has been unexciting, at least in relative strength terms, as illustrated by its sideways move up to June. However, things changed in July when the stock broke above the resistance level, both in terms of price and relative strength. The share price has retraced subsequently but its relative strength line stays at a high level, and had even made higher lows. This puts the stock in a strong position to rally once the benchmark trend weakness is over. Note that the stock broke its four-month downtrend two weeks ago and its 50-day MAV is pointing up. Its price support and resistance levels are clear at RM3.00, RM3.20, RM3.60 and RM3.80. From the widest point of the trading range, the share price may even test RM4.60 should the RM3.80 resistance level be broken. However, a break below RM3.00 should see it heading lower. This should also see a breakdown in its relative strength line. Expect support at the May and Feb 2010 lows of RM2.60 and RM2.40 respectively.

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