Most retailers assume that when the market index rallies, trading activity explodes, and when the index falls, the market “goes quiet.” It sounds logical: a rising index signals optimism, and optimism should lead to more buying and selling. But when one study ran 20 years of Bursa Malaysia data through the numbers, the KLSE index turned out to be a terrible guide to how much people actually trade.
What Most Investors Believe
If you hang around any stock group long enough, you’ll hear some version of this logic:
• “Index Green today, sure volume will be strong.”
• “KLCI Weak, better wait. Market no mood.”
Behind this is a simple story: when the economy is doing well, and stock prices rise, investors feel confident, and that confidence shows up as more trading activity. Past research in other markets has often found links between economic growth, stock returns, and trading volume, so the belief is not coming out of nowhere.
But beliefs are one thing. What does the Malaysian data actually say?
What This Bursa Study Actually Did
A paper by Yeoh (2022), published in the Journal of Social Sciences and Management Studies, tried to answer a straightforward question: “Do KLSE index movements actually line up with how actively investors trade on Bursa Malaysia?
To test this, the study:
• Collected monthly data for the KLSE market index and total trading volume from 2001 to 2022, using public sources such as Yahoo Finance
• Covered major events like the 2008 global financial crisis and the Covid 19 downturn, so both boom and crash periods are in the sample
• Used SPSS to run two basic tests:
o Correlation: Do monthly changes in the index and changes in trading volume move together?
o Regression: Can index growth help explain or predict changes in trading
In trader language, the study asked:
- “When the index goes up, does volume usually go up too?”
- “Can I use index performance to predict how active the market will be next month?”
What the Numbers Actually Showed
The results were almost shockingly clear.
• The Pearson correlation between KLSE index growth and trading volume growth was 0.001797885.
• A correlation of 1 means perfect positive co movement, −1 means perfect negative, and 0 means no linear relationship.
• 0.0018 is so close to zero that, statistically, the two series might as well be unrelated.
The regression told the same story:
• Index growth was used as the independent variable, and trading volume growth as the dependent variable.
• The p value on the index variable was 0.9785, way above the usual 0.05 significance threshold
• In practical terms, the model found no evidence that index movements explain changes in trading volume.
Over 20 years, “index up = volume up” simply did not show up in the data
What This Does Not Mean
It’s important not to overinterpret the result.
The finding does not mean the KLSE index is weird. The index still summarises overall price levels, reflects macroeconomic conditions, and reacts to major shocks such as recessions, pandemics, and policy changes. What it does mean is narrower: at the monthly level, changes in the index and changes in total trading volume on Bursa Malaysia do not move together in any consistent, statistically detectable way.
In other words, the index is a snapshot of price performance, not a reliable gauge of market activity.
Why Volume May Not Care About the Index
The study’s discussion suggests that investors might not be keying off the index when they decide to trade. Instead, their decisions may be driven more by individual stock stories (earnings, corporate actions, sector news).
• Personal risk tolerance and financial situation.
• Broader uncertainty (for example, during crises) that affects sentiment in uneven ways.
This fits what Bursa traders often see on the ground:
• A mid cap stock can hit limit up on heavy volume after a contract announcement, even when the KLCI is flat or slightly negative.
• Sector-specific themes (such as commodity prices, glove demand, or government infrastructure spending) can spark furious trading in a handful of counters while the overall index barely moves.
• Retail waves often follow viral headlines or social media narratives around particular names, not around “KLCI +10 points.”
The paper’s conclusion aligns with this: the author argues that investors may be assessing potential returns based on individual stocks rather than the stock market as a whole, which helps explain why KLSE index growth and trading volume growth show no meaningful relationship.
Behavioural Drivers the Index Cannot Capture
Another key point from the study is that trading activity is likely shaped by personal and behavioural factors that the index cannot see. The author highlights variables such as Risk tolerance.
• Income level.
• Investment experience
These are very much in line with broader behavioural finance work: two investors facing the same market index can behave completely differently depending on their risk appetite, financial buffer, and understanding of the market.
For example:
• A high risk, experienced trader may continue trading aggressively through drawdowns, exploiting volatility.
• A cautious, newer investor may freeze or fully exit during the same period, regardless of whether the index closes green or red that month.
The study suggests that to really understand why Malaysians trade the way they do, we need investor-level data and survey-based approaches that capture these psychological and demographic elements, not just index-level time series.
What This Means for Your Trading
For retail investors, the practical message is straightforward:
• Do not treat KLSE index moves as a volume signal. Over 2001–2022, index growth explained none of the variation in Bursa trading volume essentially
• Anchor your decisions in company specific information. Earnings quality, balance sheets, sector outlook, management changes, and corporate actions will matter far more to the liquidity and price path of a single stock than whether the index is up or down a bit this month
• Be honest about your own risk profile. Your risk tolerance, income, and experience will influence how actively you trade far more than the latest index reading
• Use the index for context, not triggers. The KLSE index is still useful to understand where we are in the cycle (crisis, recovery, late bull, etc.), but it should not be your main trigger to expect higher or lower trading activity in your preferred countersIf you’ve been delaying entries just because “index lemah” or chasing trades only when “index kuat,” this study gives you a good reason to rethink that habit
Limitations You Should Keep in Mind
No single paper is the final word. Yeoh (2022) is transparent about several limitationsThe study uses historical, index level data only; it does not observe individual investor decisions directly.
• It focuses solely on the Malaysian market; applying the same method in other countries could produce different results.
• Trading behaviour might be better captured with investor level surveys that include psychological and demographic variables such as risk tolerance, income, and experience
As a result, you should treat the findings as strong evidence against the simple “index up, volume up” story in Malaysia – not as a claim that the index is irrelevant, or that behaviour cannot change going forward.
Key Takeaway for Malaysian Retail Investors
A 20 year sample of Bursa Malaysia data found:
• Correlation between KLSE index growth and trading volume growth: effectively zero (≈0.0018).
• Regression link between index growth and volume growth: statistically insignificant (p value ≈0.9785).
The KLSE index remains a useful snapshot of overall market price levels. But if you’re trying to understand or predict trading activity – especially in the stocks you actually trade – this study suggests you are better off focusing on:
• Company fundamentals and catalysts.
• Sector level developments.
• Your own risk appetite, time horizon, and trading planIn short, the index tells you how the market is priced; it does not, at least in the Malaysian data, tell you how actively investors will trade.
Reference
Yeoh, W. W. (2022). “To Study the Reaction of the Investors in Trading Behaviour in Bursa Malaysia Based on KLSE Market Index Performance.” Journal of Social Sciences and Management Studies, 1(4), 73–7)