The algorithm trading strategies may have triggered the initial selling after sell signals are indicated and triggered, says dealer

by SHAZNI ONG/ pic by MUHD AMIN NAHARUL

TECHNICAL price correction in rubber glove manufacturers may weigh on the market in the immediate term as investors continue to sell the sector stocks after a sharp rally in prices in the past two months.

Four of the biggest glovemaker companies in the country by market capitalisation and production capacity saw their stock prices continue to fall thus, dragging the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) lower by 13.19 points or 0.8% to 1,585 points at close yesterday.

The “Big Four” — comprising Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd — were the top losers in the trading day as well.

The selling pressure hit Hartalega the hardest, as the stock dropped 8.24% or RM1.40 lower to RM15.60, followed by Top Glove which fell 5.87% or RM1.36 to RM21.80. Supermax slid 5.28% or 84 sen to RM15.06 while Kossan dipped 5.93% or 80 sen to RM12.70.

The profit-taking was a continuation of the volatile trading session seen in the glovemakers in the final hour of trading on Tuesday, which saw the benchmark FBM KLCI hit a day low of 1,577 points before late buying saw the benchmark retrace some of the losses to close 7.7 points lower for the day at 1,598.75 and after hitting an intraday high of 1,617.

A local dealer told The Malaysian Reserve (TMR) algorithm trading strategies might have triggered the initial selling after sell signals were indicated and triggered.

“The rubber glove stocks are trading at an overbought level and the price action might have flagged one or the algorithm indicators to react. Coupled with sudden sell-down with high volumes could well further push down the market more. I don’t believe they triggered the sell-down, but I believe the system was triggered by the sudden price movements,” a dealer told TMR.

He added that many felt the liquidity-backed sharp price rally in the glove manufacturer stocks were overvalued over the counters with some cautious investors opting to take profit despite the sound business fundamentals of the sector.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid concurs with the view of elevated valuations of the sector stocks.

“The run-up in the glove-related stocks has been quite extensive. Logically speaking, someone who is really in for the money would want to cash out or realise gains.

“From the technical point of view, I suppose the rubber glovemakers stocks may have reached an overbought position. Therefore, the stock prices are prone to technical correction,” he told TMR.

Fundamentally speaking, Mohd Afzanizam said the sector does have a compelling storyline, especially in the health context of the Covid-19 pandemic.

The companies have also been expanding their production capacity due to sustained growth in demand of 5%-6% annually.

The pandemic has caused an increase in the pricing power of producers as the usage of gloves increases with demand levels now eating into stock levels as producers struggle to meet fresh orders despite the increased production capacities.

“So, the premium ascribed by the market to the rubber glove industries could be well justified,” Mohd Afzanizam said.

Recent analyst reports from various brokerages have raised their valuations for the counters due to the strong demand and pricing power the glovemakers are currently enjoying.