While the broad-based rally has been much enjoyed by investors, there are concerns on how long the stock market party can be sustained.
After all, the rally has not been supported much by substantial improvement in market fundamentals, but rather sentiment and expectations.
Moving forward, corporate earnings are likely to remain lacklustre throughout the year as the continuing Covid-19 fears globally stoke uncertainties.
In view of the uncertainties, Bursa Malaysia and the Securities Commission (SC) are leaving no stone unturned in preparing the local stock market for severe volatility and potential sharp price reversals.
Following the earlier decision to extend the temporary ban on short-selling activities, the capital market regulators had on July 10 announced the move to revise the circuit breakers as well as static and dynamic price limits for a six-month period from July 20,2020 to Jan 18,2021.
This is aimed to provide added stability and confidence in the marketplace.
“The decision for these precautionary measures took into account global market conditions that remain volatile amidst persistent uncertainties due to Covid-19, continued economic weaknesses and the re-escalation of geopolitical tensions, ” according to Bursa Malaysia and the SC in a joint-statement earlier.
The new circuit breaker levels, in particular, have been well accepted by stock market experts.
Speaking with StarBiz, Rakuten Trade Research vice-president Vincent Lau (pic) said the new circuit breaker acts as a “safety net” at a time when stock prices have increased tremendously over the past several months.
This is necessary to ensure that the downside risks are limited, according to him.
“While the circuit breaker is only limited to FBM KLCI in the event the constituent stocks were hit by a major selldown, it helps to create a feel-good factor to other stocks.
“The sustained movement of the FBM KLCI will improve the overall market sentiment, ” he said.
A circuit breaker refers to a market-wide approach to manage downward movement of the barometer index by halting trading temporarily in the market during normal trading hours, during which time information is disseminated to all market participants.
Following the announcement on July 10, circuit breaker levels will be reduced to two – when the FBM KLCI records a decline of 10% and 15% within a trading day – from three levels currently (10%, 15% and 20%).
There is no change for the first level. Trading will still be halted for one hour if triggered between 9am and 11.15am as well as between 2.30pm and 3.30pm, and will be halted for the rest of the trading session if triggered from 11:15am to 12:30pm or from 3:30pm to 5:00pm.
However, for the second-level circuit breaker, trading will be halted for the rest of the day as soon as the index falls by an aggregate of or more than 15% of the previous market day’s closing index.
Fund manager Danny Wong believes that the decision to revise the circuit breaker trigger levels indicates the cautious sentiment of Bursa Malaysia and the SC on the stock market volatility.
Wong, who is the chief executive officer of Areca Capital, said the lower trigger levels were necessary, considering the current “abnormal time”.
“We are seeing more retail investors coming into the stock market and they are likely to be affected more by the herd mentality. When the panic selling starts, those influenced by the herd mentality could further worsen the price downtrend as a result of the panic selling.
“What the regulators did was a form of investor protection and to calm the market in the event of severe volatility, ” he said.
The last time Bursa Malaysia triggered a circuit breaker was on March 10,2008 when the FBM KLCI fell by 130.01 points, more than 10% from the previous close of 1,296.33 points.
Trading on Bursa Malaysia and in equity-linked derivative products on Bursa Malaysia Derivatives Bhd was halted at 2.58pm. Trading resumed at 3:58pm on the same day, with the barometer index closing the day at 1173.22 points.