Stock Market: Off the Right Track

The Vietnamese stock market is very lacklustre in 2010. According to statistics, up to 90 % of investors suffered losses while only 10 % made a profit on this market. The Vietnamese stock market was rated the worst performer in the world in 2010. Shares plunged and investors vied to catch the “falling knife” but very people managed to catch it while a majority got “bloodletting”.

 

As Vietnam lacks a perfect regulation for the healthy development of the stock market, the manipulation of stocks still occurs frequently, or in other words, stocks go against the market trend. Prices climb continuously with the support from the buy-side but then suddenly plunge like a brakeless vehicle sliding on a steep slope. When stock prices decline to a reasonable rate relative to technical indicators and market sentiment, many investors start a strategy called “catch a falling knife” - a slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value, such as in the case of company bankruptcy where equity shares become worthless.

 

According to experiences of stock investors, the faster a stock price climbs, the higher possibility of a falling knife situation happens. This is the general situation happening to all stocks regardless of how good or bad business performances of the company are. When the stock price is driven far higher than the real value and beyond the acceptable level, the sell-out spell begins to happen.

 

When a stock is manipulated, speculative forces (bulls) will try to improve its liquidity in order to catch the attention of investors. When the stock is traded at ceiling prices for many straight years, many investors will rush to buy it. At this time, manipulators will silently sell the stock at peak of greed of investors. This process can be done from one week to several months until manipulators end support for the stock as they do not hold any manipulative stock. The “falling knife” situation happens and investors rush to sell out the stock at lowest prices, making the price drop worse.

 

Take AGC shares of An Giang Coffee Joint Stock Company as an example. The stock climbed 136.7 % within just two months. The coffee exporter had relatively good technical supports. In the first quarter of 2010, AGC was not actually good as its after-tax profit was just VND500 million. As a result, the stock was traded at around VND14,000 per share. However, taking its resources into account, with an inventory worth VND318.4 billion (provisional funds excluded), which was much greater than its paid-up capital of VND83 billion and might increase in value in the second and third quarters given growing global prices, the company would earn VND19.4 billion from this source after the liquidation was made.

 

Inside information was known to manipulators and the progress of driving prices started. When the AGC price reached VND24,000, the above information began to make public to catch the attention of individual investors. This was also the time manipulators began to sell their shares to take the profit and shares continued to climb to VND26,000 and then over VND30,000 per share before dropping to VND17,900. Nonetheless, the bottom price was believed much lower.

 

However, many stocks do not follow that natural law. Technical reversal is a trap for bullish investors who used to think that they would not be able to own the hot stock.

 

AAA shares of An Phat Plastic and Green Environment Joint Stock Company are a typical example. After rising to VND90,000 per share, the stock dropped to VND52,000-54 000 - its debut price on the Hanoi exchange, and many investors scoured the stock at so-called attractive price on belief that this was the bottom price. But, the selling force from chickens was too heavy that the price soon slid to VND35,000 per share. Many investors were bloodletting when they caught the falling knife.

 

LTC shares of Low Current - Telecom Joint Stock Company were an unforgettable pain for those catching the falling knife. The stock soared 88 % in a 17-day rising streak in early September and then dropped 37 % in eight following days to the medium point of VND60,000 per share. The bottom-fishing buying intensified at this price level but the losing run of LTC shares continued with the next seven days traded at floor prices which were capped at 7 % by market regulators. The current price of LTC is below VND35,000.

The “catch a falling knife” tactics, if not bloodletting, will generate maximum profits for investors if the catching is timed perfectly, which is usually at technical support points. However, such support points will be easily broken if the market sentiment is not good and the supply outnumber the demand.

 

This year, although the economy still keeps growth momentum, tightened credit policies are hampering the stock market. In a market with a lot of downward momentum, most stocks have broken all technical supports. Most investors seem to lose the direction of the market at this point of time.