Speculation driving counters

Speculation may be an integral part of trading in the stock market, but the growing frenzy in an increasing number of stocks maybe a cause for concern for investors, particularly retail players.

A sharp rally in some of the biggest outperformers during the past few weeks has raised many eyebrows as their gains have not been supported by sufficient delivery-based volumes. Brokers fear that excessive speculative interest, which is also reflected in huge non-delivery-based volumes in these counters, could be driving these shares to new highs. In such a situation, it may make sense for small investors to stay out of the madness and take a call only after valuations come down to reasonable levels.

"Intra-day volumes of above 80% in a particular stock is surely something to worry about. Investors should be wary of investing in those stocks witnessing a sudden upswing after remaining out of market favour for years," said Karvy Stock Broking vice-president Ambareesh Baliga.

Tracking trading patterns in high-momentum stocks showed that some of them including Reliance Capital (RCL), Essar Oil, Ispat Industries, Reliance Natural Resources (RNRL) and Bhushan Steel have attracted delivery-based volumes much lower than the average ratio of around 50% for all BSE-listed stocks. RCL, Essar Oil and Bhushan Steel, in fact, saw delivery-based volumes lower than 10% on a few days in the past one month.

For instance, out of the total 4.9 lakh RCL shares traded on BSE's cash segment on Friday, trading in only 43,603 shares, or 9%, resulted in deliveries while transactions in the remaining 91% were squared off without taking delivery. The RCL stock has risen 16% in the past one month when delivery-based volumes ranged between 7.5% (November 27) and 27%. The scrip scaled a new peak of 2,525 on Tuesday and closed with a small loss of 1.2% at Rs 2,399 on Friday.

Essar Group stocks, particularly Essar Oil, have taken the market by surprise with their performance in the past few weeks. Essar Oil had zoomed 37% to close at Rs 121 on November 14 when only 15% of the traded quantity was delivered in the market. Essar Oil has, in fact, shot up 356% in the past one month. Confirming that speculative activity has increased significantly, a Delhi-based broker said, "The trend is not healthy for the market as speculative trading creates false volumes and misleads genuine investors."

The frenzied action in these stocks is mostly triggered by strong rumours or expectations of major development in respective companies. Analysts, however, warn that investors should not fall pray to such rumours unless the concerned company is fundamentally sound with high growth visibility and good management. Many a time in the past, investors had burned their fingers by chasing penny stocks, displaying unwarranted exuberance.

High level of speculative activity has also been evident in new listings, particularly those where the offers met with overwhelming public response, attracting subscription several times higher than the size. Speculators apparently have made a killing in many of the past successful IPOs, anticipating huge demand from prospective investors on listing. Listed on November 27, Mundra Port attracted delivered-based volumes of 25% on that day, which fell to 11% on November 30, the lowest since its listing. Since November 27, the stock has risen 14% to close at Rs 1,099.5 on Friday when the counter saw delivery-based volumes of 15.8%.