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Saturday, 8 August 2020

(Tradeview 2020) Malaysia Penny Stock Rally - Frenzy, Mania or Justified?

 The Main Purpose of the Stock Market Is to Make Fools of As Many ...


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As I am writing, it is around noon of Friday 7 August 2020. FBM KLCI Index is down -1% Year to Date 2020. The FBM KLCI Index for those who are unaware consist of the Top 30 weighted shares of the stock market.  Now in comparison, I would like to bring your attention to Ace Market Index. The Ace Market index, Malaysia's secondary market index which consist of most penny stocks, are up 130% Year to Date 2020. Did you all notice this huge disparity? 

Usually, when the share market is good, it would mean the main market index which is KLCI Index would do well, followed by the second and third liners. In our case, it would appear that the secondary index did much better in comparison to our main index, and what I am saying is a huge understatement. In fact, the Ace Market did so much more better than KLCI Index that the gap / difference is whopping 131%. If not for the superb performance of Hartalega, Top Glove, Kossan and Supermax which contributed much to the KLCI Index, the performance gap would be even more glaring. 


Penny Stocks Performing Better Than Blue Chip Stocks?

As seen from the chart above, ACE Market flat our beat the KLCI Index year to date. What the chart is telling you that penny stocks outperform blue chip stocks. Going back to Investing 101, the very basic about share price is that it correlates to earnings. If earnings are bad, share price is bad. Vice-versa. So based on this chart above, it would mean that penny or small cap companies are delivering better earnings and growth than blue chip big companies. Does this even make sense to you? 

Sure, you may argue that smaller companies do not lose as much money as big companies as it would mean they are less affected by Covid-19. But I would like to highlight the fact that smaller companies usually do not have cash buffer or access to capital / loan / funding like the bigger companies. So this argument is nullified. Furthermore, the likelihood of SME or small companies going bankrupt is much higher in terms of % compared to big blue chip companies. This is why "Blue Chip" term is given to strong steady companies which is likely to weather difficulty hence always command a premium in share price.


Record High Level of Retail Investors' Participation

The data above shows July 2020 full month trading participation, volume and value in breakdowns. It is clear from the above that we had a record month in terms of volume and value. (For August, likely to exceed that of July). There were 23 days of trading days excluding weekend and public holidays. With that number, it would mean that the average traded volume per day was 9.2 Billion & the value traded per day was RM 5.23 Billion. These numbers are phenomenal. 

Now consider this : Local retailers is the single largest market participants category both in terms of value traded and volume traded at 35.3% & 45.8%


Again, please note that I have not even factored in August month record volume and value whereby a record high was achieved yesterday at 22 billion volume traded & RM 9 billion value traded. 


Irrational Exuberance / Irrational Market Spurred Thematic Plays

I believe the huge inflow of retail participation has gotten the how market lively and exciting. They always say, some level of speculation in the market is healthy. However, are regulators living up to their roles in facilitating control and order? How many UMA have we seen issued with no less than 20 counters going limit up in the past few weeks?

With that, it draws in a lot of syndicates, goreng groups, operators, sharks who specialises in pump and dump operations in expense of naive, inexperienced, new retail investors. With the slightest connection to thematic plays, a subpar story with superficial reasoning will capture retailers frenzy, mania and fear of missing out (FOMO). If today, I were to publish an article remotely related to Covid-19, Gold price, Vaccine, Gloves, PPE, Election, MOU, Government Contract, I believe the share price would jump many folds especially if it falls under micro cap or penny stock category. All these are flat out warning signs of an overheated market. 


Unjustified Stock Price Rally With No Earnings To Support

Most of the penny stock that rallied in the past week has no basis or justification. There are no earnings to support as seen by their results time and time again. Even the most recent results by Esceram and Luxchem are a joke considering the market has hyped up their stock as Covid-19 pandemic glove ancillary beneficiaries. The funny thing is, even the companies' directors and substantial shareholders are throwing their shares.

Trust me when I say, compared to some of the garbage penny stocks, Esceram & Luxchem are considered quite commendable already. Hence I cannot imagine why anyone would want to put their hard earned money in loss making, huge debt, poor track record stocks. It is akin to gambling at the casino.  






Concluding Hypothesis on the Penny Stock Rally Frenzy & Mania 

1. Lack of short selling mechanism to balance the good and bad stock, filtering out the stocks with poor fundamentals from the good.