Friday, July 02, 2010

Unusual Market Activity - Buy or Sell?

LATELY, Bursa Malaysia has issued unusual market activity (UMA) queries on some listed companies due to unusual price movement and trading activities.

Normally, companies that are being issued UMA queries have very high trading volumes and surge in stock prices within a short period of time without any significant corporate announcement.

Based on our observations, in most cases, the stock prices for companies affected will not go up after the UMA queries, as most investors might view these queries as negative event to the companies.

Even though the stocks are not being suspended for trading, most traders will try to avoid them as they may be suspended later.

According to the Main Board’s Listing Requirement (LR) Paragraph 9.11, UMA is referred to as unusual price movement, trading activity or both.

The listed issuer must immediately undertake a due enquiry to seek the cause of the UMA in its securities. They are required to determine whether the UMA are attributed to information that has recently been publicly disclosed, has not been publicly disclosed or is a market rumour.

Most of the time, the UMA queries are issued on companies with some possibility of trading on material non-public information.

According to LR Paragraph 9.15, insiders must not trade on the basis of material information which is not known to the investing public.

Besides, according to Section 188 of the Capital Markets & Services Act 2007, anyone who commits an offence under insider trading shall be punished on conviction to imprisonment for a term not exceeding 10 years and to a fine of not less than RM1mil.

Despite heavy fine and punishment for trading on insider information, each time Bursa Malaysia issues UMA queries on any listed companies, the general public may be able to predict the “standard” replies from them.

The “standard” replies from these companies are “To the best knowledge the Board of Directors of the Company is not aware of any other corporate developments, any rumour or report, any possible explanation on UMA or any material information ....”

It is very seldom that the listed companies will explain in detail on the UMA.

Even though we do believe that sometimes certain listed companies may not be aware of the sudden surge in stock prices and volumes, however, if the trading volumes per day accounted for a big percentage of the outstanding shares of the listed companies, the major shareholders may be aware of the reasons driving the heavy trading volumes.

This is because usually the key owners of the companies are, at any time, fully aware of the major shareholders of their companies.

Being retail investors who own a very small number of shares in these companies, we need to observe how these companies response to the UMA queries. If there is no other major corporate developments after the UMA queries, like what they claimed earlier that they were not aware of any major corporate developments, then we will consider their earlier “standard reply” as genuine.

Otherwise, if there are major corporate developments within the companies in the subsequent periods, we believe that there may be certain forms of insider trading during the UMA period.

As mentioned earlier, traders and speculators will try to avoid speculating stocks with UMA queries because they worry that if the stock prices continue to surge higher, the companies may be suspended from trading.

A good quality of management will try their best to explain the possible causes for the UMA whereas a bad quality of management will only provide minimal information with the “standard” reply and take advantage of higher share prices in the subsequent major corporate announcements.

Lastly, as one of Abraham Lincoln’s (America’s 16th President – 1861-65) famous sayings: “You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time”.

We believe that sometimes even though some companies’ owners may be able to take advantage on investors, it will eventually be discovered by the public and resulted in a bad reflection on the quality of the management.

As investors, we need to be extra careful when considering buying into these companies in the future.

4 comments:

F.Orex said...

WAIT WAIT WAIT:The market is oversold, a bounce is likely at some point however; we are in a bear market and all one can do is wait it out until proper set-ups are being done..

I. Vybot said...

In swing trading,profits can be sought by engaging in either Long or Short trading.

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