A STEADY flow of bad news is beginning to dampen jittery retail investors' appetite for penny stocks and S-chips.

While blue chips took a hit yesterday, following weaker-than-expected United States job data released last Friday, their collateral fallout was nowhere nearly as serious as the rout suffered by penny stocks and China plays.

The benchmark Straits Times Index (STI) had managed to recover most of its losses during the day, but a last-minute sell-off during the pre-close trading session - used by dealers to settle outstanding positions - caused it to plummet 20.8 points to close at 2,583.73.

This marked the first time in over a month that the STI ended the day's trading below the 2,600 level.

Intraday movements of stock indexes tracking China plays, or so-called S-chips, and penny stocks indicated that some serious selling was experienced by these two sectors. In particular, penny stocks were knocked sideways as traders scrambled for the exit, after bidding up their prices in recent weeks.

The FTSE-ST Fledgling Index - covering 311 penny stocks - lost 3.9 per cent, while the FTSE-ST Small Cap Index - tracking 97 counters and includes punters' favourites such as Yongnam Holdings and Tiong Woon - fell 2.9 per cent.

As market sentiment soured during the day, China plays did not escape the pain. The FTSE-ST China Top Index that tracks 20 S-chips fell 2.5 per cent. The question on the lips of investors was whether S-chip businesses would take a big hit once the effects of the Chinese government's stimulus package wear off.

This led to widespread profit-taking on many counters that had advanced sharply in recent weeks - including Synear Food Holdings, which fell 2.5 cents to 31 cents; Raffles Education, which lost 2.5 cents to 46.5 cents; and Yanlord, which was off five cents at $2.17.

But the big concern dogging investors was whether the nascent recovery in the United States and Europe was in danger of being suffocated by falling consumer demand and rising unemployment.

This anxiety was fuelled by top bankers, such as HSBC Holdings' chief executive Michael Geoghegan, suggesting that there might be a second economic downturn in the coming months.

No surprise, then, that the biggest drop among STI component stocks was experienced by the economic-sensitive banks. DBS Group Holdings lost 18 cents to $12.60 and OCBC Bank fell nine cents to $7.51.

Another investor concern is the impact a huge IPO might have on the local bourse, given the recent unhappy experience in Hong Kong where market vitality has been sapped by the many China IPOs launched in recent months.

With the STI sticking around the 2,600 level for the past two months, there were fears that a biggish IPO here might trigger a major sell-off.

Dealers noted that property counters turned weaker yesterday, after CapitaLand said it would hive off its shopping malls as a separate listing.

While CapitaLand was halted from trading, rivals such as City Developments fell 20 cents to $9.70, Keppel Land slipped eight cents to $2.58, while Wing Tai Holdings lost seven cents to $1.57.

engyeow@sph.com.sg