Investors should not follow the psyche of day traders


Dec 22 - 28, 2003



After touching 4605 level in September 2003 the KSE-100 index has been registering movement which seems rather strange. If one looks at the daily closing figures, the fall gain may not be substantial. However, when one looks at the intra-day movement of the index, it is mind boggling. Lately, there was a forecast of renewed interest on investors in equities and that index may touch 5000 level but the upward journey seems pegged down. While most of the retail investors seem lost, analysts interpret the phenomenon in different ways.

The first observation is investors in general and traders in particular are following the rule 'buy on weakness and sell on the first available opportunity'. They prefer to avoid taking delivery and sell their purchase before the settlement date even at Rs 0.50 difference, irrespective of the quoted prices. This phenomenon is commonly known 'toppi drama'. Such traders do not normally trade in volume leaders or blue scrips but actively participate in scrips in which speculative movement in common. They reap handsome profit at times but loss in one particular transaction also eats up the gains made over a long period, at times they loss substantial part of their original investment. To cover the loss they trade more desperately and losses continue to mount. A large number of novices enter the market and mostly loose. These are the people who enter the market to make a killing but are often killed.

The second observation is that the share of second and third tier scrips has increased substantially in the daily trading volume. According to market sources, "The scrip specialist brokers' initiate and fuel such rally, the reason being that they control substantial share of market float of such scrips. If one looks at the quoted price and expected dividend of these scrips, no serious investor should be willing to invest in these shares only because these are the picks of daily traders. A lot of novices are unable to distinguish between the scrips suitable for the investors and the picks of daily traders."

The third and rather strange observation is that prices of those public sector companies whose shares are being offered by the government through public subscription start moving up and often cross the offer price. NBP and OGDC are two recent examples. It is believed the brokers' fraternity often assumes the role of market makers. If the public interest is low they create euphoria and gradually the daily trade figures of these scrips start to swell. One analyst told: "At the time of offer of third tranche of NBP shares some of the brokers told the government not to offer the share at Rs 46/share but the advice was not accepted. The result was NBP share price plunged below the offer price around the subscription date. However, most of the brokers decided to submit as many applications as possible because they knew that offer price was far below the net asset value."



As against this, shares of OGDC were offered at Rs 32/share. Some of the critics were of the opinion that the government should not offer these shares below Rs 50/share. The result was very huge over subscription, six times the size of offer. According to market sources trading of OGDC shares started even before the close of public offer. Its price hovered around Rs 50/share around the date the government announced the allocation criteria. OGDC has emerged to be a volume leader. However, the volume or price movement does not affect the KSE-100 index as it is still not part of the index. The scrip will be part of the index at its next re-composition.

SSGC is presently pick of the market makers and speculators because of the expected offer of its share under the government's divestment plan. It is believed that the government will offer 5% shares with an equal green shoe option in January 2004. Though, the subscription date and offer price have not been announced as yet, market punters say that the offer price will not be less than Rs 25/share. Therefore, the quoted price of SSGC share is hovering around this level. Some analysts say that the price may go beyond Rs 30/share even before the subscription date and offer price are announced. They also say that while the market makers are trying to push the price to their desired level profit-taking keeps on pulling the price down.

It is also being said that the recent see saw movement of the index is due to implementation of revised list of COT eligible securities and amendments in exposure rules. However, some of the analysts do not accept this rationalization. They say' "Since most of the scrips in which speculative activity is at the peak are part of the revised list, being implemented from December 15, 2003, one should not link the market behavior with the new rules of the game."

So far the equities market has remained vibrant due to liquidity. However, the only point of concern is that with the decline in remittances and the forecast for increase in interest rates, will the money continue to flow to the equities market? May be yes because once the 'flight by night' phenomenon is over and volatility is reduced serious investors are expected to make an in road. Only then consolidation of the market will commence.