Momentum remains bullish

There is no change in this column's view about market outlook for 2009 as published four weeks ago. Although the strong rally on the first trading day of the New Year was unexpected, it was within this column's prognosis of a bear market rally in first quarter that will drive the index to hit its fair value of 1,050 based on a bottom-up approach. I still believe a market bottom of 670 to 725 points based on 1997 and 1998 trough PER of 8.3x and 9x could be seen in the third quarter of this year before it rebounds to close the year at 850. This is a contrarian view to a market that expects the index to bottom in the first half and rebound in the second half.

A bear market rally is expected early in the first quarter due mainly to external factors and the Capricorn Effect. Developments in the US after Barrack Obama takes office as president will be the cornerstone for any rebound in global equity markets as he is expected to approve a massive fiscal stimulus programme to restore US economic growth that will sustain job creation and long-term expansion.

Global equity markets are expected to react positively to this stimulus that will coincide with the momentum created by the seasonably visible Capricorn Effect. The local market is expected to sustain this momentum, to a lesser degree, in the first quarter, with a change in the country's leadership in March that could be followed by a stimulus package to prop up domestic expansion.

Market correction will continue in the second and third quarters as the unprecedented fiscal stimulus, monetary loosening and corrective measures undertaken by governments around the world will take some time to correct the economic imbalance and bring the desired results. Disturbing economic data that are expected to emerge from Europe and countries in Asia like China and Japan will cap the upside and lead to more corrections in the index in those quarters before market moves ahead of a significant economic recovery, which is only expected in 2010, in the fourth quarter.

For this week, expect the positive momentum from last week to continue unless the trade numbers that will be released on Wednesday turned out to be worse than expected. Consensus figures are 6.2 per cent and 5.3 per cent contractions in exports and imports respectively.

Conclusion
With all technical momentum and trend indicators on the KLCI that been tracked flashing bullish signals, further upside bias is in store this week. Moreover, the bullish breakout last Friday above 888, coinciding with the upper band of the downtrend channel from the all-time high of 1,525, will enhance upside momentum towards an immediate target of 920 to 926. Further up, look for stronger resistance from 940 to stall gains, with 949 acting as a more formidable upside hurdle. Meantime, immediate support is revised upwards to 888, with stronger supports seen at 880, then 864 and 850.

Sector wise, plantation and oil & gas stocks are expected to out-perform this week given the strong rebound on crude oil prices in New York, which was sparked by increased geopolitical concerns in the Middle East.

Investors should look to take profits or sell on rally banking stocks such as AMMB, BCHB and Maybank. Interest in the sector will dissipate as loan growth slows and non-performing loans rise this year.

The subjects expressed above are based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.