Penny stock rally screeches to a halt amid rumours of trading curbs
Some Sesdaq counters dive by as much as 25% as investor sentiment sours suddenly in late afternoon
By Goh Eng Yeow, Markets Correspondent
A SUPER bull run by penny stocks was stopped in its tracks yesterday, at least for now, as some counters slumped by up to 25 per cent from intra-day highs.
These stocks suffered an even sharper downturn than the wider market, following a government announcement seen by some as a measure to cool the property market. Development charges, levied when a land user enhances the value of a site, were raised from 50 per cent to 70 per cent.
The UOB Sesdaq Index, which tracks small-capitalised shares, has surged by about half in the past three months.
At the opening bell yesterday, it was still all roses for penny stock investors as they pursued reverse takeover targets such as Rowsley and Ban Joo.
But at about 3.15 pm, sentiment suddenly soured. Sesdaq crashed by about 10 per cent from an intra-day high of 308.11 in just over an hour. It finally closed 7.4 per cent lower at 278.04.
But the frenzied trading helped lift market volume to a stunning record of 9.14 billion shares - causing online trading at some brokerages to slow down considerably. ‘It went from unbelievably bullish to unbelievably bearish in just hours,’ said a brokerage dealer, Mr Burnie Lee.
Traders were unnerved by a sharp selldown of property stocks by institutional investors reacting to the Government’s move to raise development charges.
The benchmark Straits Times Index tumbled 1.8 per cent, sparking a panic sell-off of penny stocks, amid fears over a trading clampdown. ‘There are rumours that some broking houses are clamping down on the credit limits they give to remisiers for trading penny stocks,’ said local brokerage dealer Jenny Lee.
In June 1999, a similar rally in penny stocks ground to a halt after many broking houses imposed trading curbs.
But a check yesterday showed that ‘it is business as usual’ at UOB Kay Hian, Kim Eng Securities, Phillip Securities and OCBC Securities, Ms Lee said.
Phillip Securities’ managing director, Mr Loh Hoon Sun, had another explanation for the sudden correction. ‘This is a trading market. People are not buying shares for investments. They are trading penny stocks and watching price movements like a hawk. And the fall is aggravated by a stampede of people all wanting to get out at the same time,’ he said.
But one brokerage’s head of risk management said punting in penny stocks is so intense that it reflects a certain degree of irrational exuberance. The volumes of some stocks have far exceeded their number of shares freely floating in the market.
She also noted: ‘Many punters don’t even know what sort of businesses these companies are in.’
Many heavily traded stocks are those belonging to financially strapped companies with poor earnings records. These stocks are riding high only because of hopes that the companies would be revived by the new businesses which would be purportedly injected into them.
‘Reverse takeovers can take as long as a year. You won’t want to be caught holding their shares if their deals are suddenly called off, or if the market suddenly nosedives,’ she said.
The Straits Times, 19 July 2007
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