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Who is behind the last-minute push-up of stock prices?

Tong Kooi Ong and Asia Analytica
Tong Kooi Ong and Asia Analytica • 6 min read
Who is behind the last-minute push-up of stock prices?
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Have you ever wondered whether you could make some easy money off a familiar price movement pattern on the Bursa Malaysia, one which we bet many are aware of? Yes, we mean that one where the key benchmark index, the FBM KLCI, spikes sharply higher in the last five to 10 minutes or so, usually after spending the better part of the day trading sideways or in negative territory (see Chart). It is an intriguing question, no?

This year, the benchmark index has risen during the final hour in 85 out of 140 trading days until end-July. If you could buy the index at 4pm and sell it at 5pm every day, you would have accumulated a net gain of 140 points over this entire period — by summing up the net index changes in the last hour of each trading day — even though the FBM KLCI had fallen 61 points over the duration (comparing the closing price on July 29 this year and opening price on Jan 1).

Interestingly, this trading pattern is quite unique to the Malaysian market. The probabilities are much more even in the Singapore, UK and US markets, as one would expect (see Table 1).

We are not exactly sure who are the parties responsible for pushing the FBM KLCI higher at the close and for what reasons. But we have several hypotheses. One, some investors might want the stocks to close higher to maintain the margins on their margin accounts. Or certain institutional investors may do it as window dressing, for instance, on the final day of their reporting periods. Perhaps intraday short-sellers need to unwind their short positions before the market closes. The belief that stock prices tend to rise in the final hour of trade may even be self-fulling, if it means sellers would then place their offers at higher prices. Regardless, is there a way to profit from this phenomenon?

See also: Why y-o-y real wages in the US may be rising, yet its standard of living may have fallen — a statistical mirage

One possibility is to trade FBM KLCI futures. The futures generally move in the same direction as the underlying index, although there are instances in which the two may temporarily diverge. This is because prices of FBM KLCI futures are also determined by its own supply and demand, while the index itself is based on prices of its constituents.

In the first seven months of 2022, the aggregate gain for FBM KLCI spot futures, during the last trading hour, was 18 points — much lower than the 140 points gain for the index. Quite likely, this is because those investing in the index futures are well aware of these last-minute gains and have taken it into account to avoid losses. If you were to trade one futures contract every day, you would have accumulated a gross profit of RM900, before accounting for the daily transaction costs of RM30 (RM15 for each buy/sell transaction). Including transaction costs, you would have suffered a net loss of RM3,300 using this particular trading strategy. Clearly, trading the index futures is not a viable method.

What if we were to trade the individual constituent stocks in the index? Say, we select five stocks with the highest weightage in the index or the handful of stocks that frequently move higher during the final hour of trade. We did a simulation using data from June 15 to July 27.

See also: Education was, is and always will be the great equaliser

Over the 30 trading days, cumulative lasthour gains of the top five constituent stocks were insignificant. In other words, there was no clear evidence that these stocks closed consistently higher. Thus, our buy-and-sell strategy in the last hour of trade would have been unprofitable (see Table 2).

Next, we selected the index constituents that rose the most in the final hour during this period — Top Glove Corp Bhd, Petronas Dagangan Bhd, Hartalega Holdings Bhd, Axiata Group Bhd and Press Metal Aluminium Holdings Bhd. Cumulative gains from these counters were sizeable (see Table 3), but they were still insufficient to offset transaction costs. Our assumed daily transaction costs of 0.56%, which include brokerage fees, stamp duty and clearing fees, would have turned the trades unprofitable. Having said that, this strategy may well work for in-house positions of stock brokerages, without having to pay commissions.

In conclusion, empirical evidence shows that there are better-than-fair odds that the FBM KLCI will surge higher near the close of any trading day. However, there is no clear trading strategy — that is easily replicable for the average retail investor — from which we can consistently profit from this, owing to high transaction costs. This has been an interesting exercise for us, even if ultimately proven to be fruitless. Still, it is worth knowing you could profit from buying an index stock early in the day and sell it near the close, even if not consistently so. At the very least, if you are planning to sell an index-heavyweight, it may pay to wait till nearer to the close of the day.

Sidebar Article: Russian ruble strengthens — despite Western sanctions — while pound and euro collapse

Western media was nearly unanimous, loud and sensational in predicting a financial meltdown and freefall of the Russian ruble in the early days of the Ukrainian invasion as punishing sanctions were levied on the country. By comparison, those headlines are less prevalent today as the ruble defied expectations to claw back all of its post-invasion losses, and much more. Certainly, there are reasons this is so, such as high oil-gas prices and falling imports. But it surely must be the height of irony that the ruble is the best-performing currency against the US dollar this year — while almost all other major currencies in the world, including the euro, yen and pound sterling, have slumped against the greenback.

For more stories about where money flows, click here for Capital Section

— End of Sidebar Article —

The Global Portfolio declined marginally for the week ended Aug 10, underperforming the MSCI World Net Return Index. The biggest losing stocks include Guangzhou Automobile Group Co (-4%) and Alibaba Group Holding (-2.6%) while the iShares 20+Year Treasury Bond ETF also traded 1.9% lower. On the other hand, shares in DBS Group Holdings (+3.8%), Airbnb (+3.2%) and Chinasoft International (+2.9%) closed higher last week. Total portfolio returns since inception now stand at 26.3%, trailing the benchmark index’s 44.2% gains over the same period.

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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