RETAIL investors made up for time lost over the holidays by rushing into penny stocks to give the new year an octane- fuelled start.

Blue chips largely missed out on the action after having enjoyed a final sprint last Thursday to finish last year on a high note.

'Most of my clients are very bullish. They are confident that the economy is back on track to growth,' said UOB Kay Hian remisier Charlie Lim.

The new year has raised hopes that it would be the turn of penny stocks to rally after the fine showing put up by blue chips as 2009 bowed out.

There is also the likelihood of the Capricorn effect exerting its influence over the stock market, with traders traditionally displaying their most bullish mood ahead of Chinese New Year, which this year falls next month.

The net result yesterday was a clear divergence between movements of blue chip and penny stocks.

The blue chip-dominated Straits Times Index traded within a tight range and ended 3.07 points, or 0.11 per cent, lower at 2,894.55.

But the FTSE ST Catalist Index - which tracks penny stocks - jumped 4.7 per cent following a surge of buying interest by retail investors.

The retail interest boosted overall market volume to a hefty 2.21 billion shares worth $1.38 billion. This is well above the daily average volume of 1.33 billion shares worth $1.22 billion recorded last month.

Even news that the economy had contracted 6.8 per cent last quarter compared with the third quarter received a positive interpretation by economists.

Morgan Stanley Research said it was raising its growth forecast from 4 per cent to 5 per cent this year after factoring in fourth-quarter advance gross domestic product estimates and improvements in the global economy.

'We see another technical recession as unlikely. Recall that Singapore had entered into a recession in the second quarter of 2008 and exited from it a year later,' it added. 'A double-dip global recession is not our base case, given the global policy support still in place.'

Still, going by the way trading kicked off yesterday, stock-picking is likely to be far more important compared to last year when a rising tide of liquidity into the region lifted all markets at the same time.

Going by yesterday's trading patterns, traders were betting on China stocks with the potential to become recovery plays.

These included Cosco Corp, which rose four cents to $1.23, and China Milk, up 2.5 cents at 36.5 cents.

Stocks that might seek listing in Hong Kong also enjoyed buying interest.

Fertiliser company China XLX, which is already listed on both exchanges, rose 5.5 cents to 67 cents, while Z-Obee Holdings, which is eyeing a Hong Kong listing, gained 1.5 cents to 25.5 cents.

Oil-and-gas firm Swiber Holdings ended nine cents up at $1.11, as its order book gained momentum.

OCBC Investment Research said yesterday that while the contract wins were positive for Swiber, it was uncertain over the margins which the firm would be getting for its new projects.

It kept its hold call on the counter.

engyeow@sph.com.sg