Everywhere you go, whether it’s a Little League game or a cookout, people are whining and moaning about the market. It is especially true of the casual investor. Many of this group is also predicting some sort of crash or sharp fall in the market in the near term. My memory tells me that some of these same people were very upbeat during the monster tech rally of the late 1990′s. Others in this group also felt comfortable buying stocks and mutual funds when the market already rallied off of the bottom during our last big decline in 2009.
So what is this telling us ? It obviously shows that people are scared. It has become evident on the OTCBB, where with the exception of a few hot penny stocks, the volume has been weak at best. A stock like Distribution Management Services (DMGM.PK) may have risen more than 75% yesterday, but many other stocks recommended by some of the top penny stock newsletters traded relatively light volume. In other words you have had to be spot on to make money on the long side in this market.
On the large cap side there is a better rationale for the weak volume. Every year people are somehow baffled when the action is light in August. Did I miss something. Did PM’s and hedge fund traders all of a sudden stop vacationing in the late summer. Vacation isn’t the whole reason for the tepid trading, but it has certainly contributed to the absence of buyers.
On the other hand, major corporations are doing the exact opposite. Stock buybacks are happening on a frequent basis and M&A activity is already above the rate of the prior two years. Just keep in mind that if S&P 500 companies are willing to invest at these levels things probably are not as bad as they seem.
Yesterday U.S. markets traded down and world markets followed suit this morning. Both traders and investors are awaiting Fed Chairman Ben Bernanke’s speech from Jackson Hole. This will surely be the catalyst for Friday’s trading and tape action should be volatile
Now there are different ways to approach buying before the Fed Chairman speaks. It is probably safe to say that Mr. Bernanke has usually been clearer with his words than his predecessor Alan Greenspan. But the problem remains trying to anticipate what their message is. Experience tells me that is a losing battle unless you have a crystal ball. Trying to go either long or short before such an important speech tend not to work because of the choppiness of the market. Many traders get stopped out and then have to watch their former position trade to their initial profit target. Without them in it.
Now you have read recent blogs here about takeovers and market bottoms. However, those market trends apply to investors not traders. For instance, if you had an urge to buy a penny stock like China BTC Pharmacy (OTCBB: CNBI.OB) in the 4 dollar range as a long term hold, it may or may not be wise. However, if you had a 2-3 year window and a price target of 10, a fluctuation of 40 or 50 cents really isn’t an issue. On the other hand, if you were buying this micro-cap name as a momentum play for a short term pop, you often are gambling on Bernanke and market direction. Yes, hot penny stocks sometimes do trade in sympathy with the broader markets.
The age old question of trading before Bernanke especially applies to large cap names, which are obviously more sensitive to the Fed, than OTCBB stocks. But the same philosophy applies. If you are comfortable buying a name like Bank of America (NYSE: BAC) and have a long term investment philosophy,by all means buy the stock. But if you are a short term trader, you must remember that many good ideas turn into losses when the Fed is involved. This is why it is often best, to put the trading ideas on hold. Being impatient in the market is often a recipe for disaster.
Stock Futures are up this AM, due to jobless claims falling to 473000. This number wasn’t great, but it was much better than the week before, when claims were over 500000.
To put this number in perspective, claims rose to the 650000 range last year and a claim number in the 350000-400000 range is generally viewed as a positive for the economy. My sense is that the downfall this week was in anticipation of a disastrous number. Well, it looks like short sellers may be disappointed and a bounce potentially could be near.
Keep in mind that we have some other factors that could be used a rationale for a bounce. First, we have poor investor sentiment, which has led to anemic volume, all the way from the NYSE down to the penny stock market. We also, have see takeover fever. Large cap companies are going on a buying spree and using cash a the vehicle. Companies like Dell , BHP Billiton and Intel obviously see value at these levels. Lastly, this morning’s number could be pointing to the fact that the economy may not be good, but at the same time isn’t as bad as people think.
Hopefully, this leads to some bottom fishing in the near term. Many of us own blue chip stocks that are down. Some of us also own once hot penny stocks that have lost the interest of investors. My advice is to re-evaluate your portfolio and add to some fallen positions if it makes sense. After you compile your blue chip and penny stock lists. Review each position and see if anything has changed fundamentally. Now if your current losses in the position are not that big, it may may sense to average down.
Adding new positions also might make sense if you have the liquidity. Especially since we may have seen the bottom already in oil prices. A bounce in oil has recently seemed to be a catalyst to the market and could rally the larger exchanges and make quality commodity based penny stocks look attractive.
Whatever you decide to do, make sure it is done relatively small. While we may turn higher from here looking for bounces and bottoms doesn’t always work.
As we have mentioned many times in previous blogs, takeover fever is back. Potash and McAfee lead the headlines and HP jumped right over Dell’s previous bid for 3Par. The common denominator in all of these deals and for that matter proposed deals, was the cash takeover.
Many companies often prefer to acquire other corporations in stock deals. Basically, the prospective buyer uses their own stock as currency in the transaction. This is often done because the acquiring company often feels that their stock is either fully valued or inflated. This past few deals have been different because the premium paid was all cash. Potentially signaling to the market that the acquirer feels that there own companies share price is too cheap.
Now this seems to be a positive for the market because if S&P 500 companies would rather part with cash, this tells us they are confident going forward. Small and microcap stocks often don’t have the luxury of large cash positions and have no other choice other than using stock to make these deals. For example, even the most promising microcap or penny stock, usually uses a rising stock price to for buyouts. Simply because they are growth stories with little cash. However, the big boys can do either. Hopefully this vote of confidence will trickle down from the NYSE to the OTCBB.
So if you ever see a penny stock participate in an all cash buyout, you are getting a signal from management that things are good. Most times reading signs from companies is much more accurate than trading reports, brokerage analysts or penny stock newsletters. But, you have to sometimes read between the lines. So do your home work and prepare your large cap and penny stock lists.
Today a news story came out that was somewhat disturbing. Mutual fund giant, Fidelity Investments reported that a record number of hardship withdrawals were made from retirement accounts. Also investors who borrowed from account hit a 10 year high.
Now what does that tell us ? Some can analyze this news in a gloomy fashion. Others may look at it as a tremendous buying opportunity. Many of us remember the go-go bulls markets of the 80′s and 90′s where excess ran rampant. Some of us knew ordinary people who somehow accumulated high 6 figure and even 7 figure accounts, due inflated gains in the market.
In both of those bull markets it seemed easy to make money. Everything from blue chips to penny stocks seemed to work. Even when positions were in the red, it seemed that in time they would turn around. And for a time that strategy worked. Until of course, the optimism became too high. Shortly after the two huge runs, we saw the Crash of 1987 and the Internet Bubble burst.
Right now we may be seeing the polar opposite. Although we are currently seeing decreased market volume due to summer doldrums, there is another factor attributed to the light trading. It’s a sad one too. Many retail investors have simply thrown in the towel.
Historically this has been a buying opportunity and could be lucrative for those who are liquid. Sir John Templeton always wanted to buy in times of turmoil and sell in rallies. By no means am I saying to jump in with two feet, but a legitimate look at this market should be taken on a long term basis. Even if it’s seems to be a little early. This means taking a look at everything from the NYSE to the OTCBB.
However, you must be prudent. Sadly enough many of the above mentioned who borrowed versus 401k plans simply fell on hard times. Others, though simply overextended themselves. Either in their lifestyle or by trading to aggressively. These stories range all the way from somebody who lost their job all the way down to somebody losing a substantial amount on a mining penny stock.
This is why you never invest what you can’t afford to lose. For instance, right now we are seeing major consolidation in the Ag space. This M&A activity does merit a look at the sector and it wouldn’t be unreasonable to commit trading money into one of the names.
However, the amount of the investment has to be prudent. Just in case it doesn’t work. So if you want to take a contrarian view on the negative investor sentiment. Do so wisely. For instance never commit 30 or 40 percent of your portfolio to a stock. It doesn’t matter if it is a dividend paying blue chip or a hot penny stock. Also don’t trade on margin. Even if you can afford to. Lastly, and most important. limit your losses. Don’t be afraid to lose 10% on a trade. Preservation of capital is more important than missing out on a winning trade. So if you buy into this contrarian market view, be smart and not greedy.
Last night’s Mad Money show was a keeper. Especially for traders and investors who are currently long.
Cramer opened the show with a theory about how the recent takeovers bids like BHP Billiton (NYSE:BHP) for Potash (NYSE:POT) show that some people still feel this market is too cheap. Cramer mentioned that mergers are up this year in relation to 2008 and 2009.
He also spoke of the “old days”. Which happened to be right after the Crash of 1987. Back then, stocks were so cheap, that many of them were acquired by other companies. I took his remarks in a pretty simple fashion. If the big boys are willing to buy entire companies. Maybe it is time to step in.
Cramer also mentioned that despite some of the positive earnings, many investors failed to be enticed. Now here is the good part, Cramer mentioned that investors may be lured back to the market due to this increases M&A activity.
My sense is that if Cramer is correct, we could see major activity with penny stocks this fall. From my experience, I have noticed that retail investors who speculate, do not have much of a problem buying a stock like Mosiac (NYSE:MOS) and then turning around the next day and allocating five or ten thousand dollars into something they perceive to be a hot penny stock.
Although M&A activity on the OTCBB is usually sparse at best, some microcaps on the AMEX could eventually be in play in the rumor mill. Keep in mind that a rising tide lifts all boats and the return of speculative buyers to the market could make things interesting soon. Hopefully we have not missed it and Cramer is early with his theory. I would venture to guess that he is, and that many large cap and penny stock newsletters will try to jump on this trend. So read up !
Many political pundits and pollsters expect the Republicans to at least take back the house, and possible the senate this November. Some are even calling for a repeat of the “Republican Revolution” that happened in 1994, where republicans steamrolled the democrats with anti-Clinton fervor. However, some say this drove the left leaning Clinton administration to the middle and set the groundwork for the historic market rally of the late 1990′s.
Could a republican house move Obama to the center ? In theory, yes. Recently, Obama has had problems getting his own party on board to vote on key issues, especially moderate to conservative democrats in swing states or conservative voting districts.. He has often relied on picking off the few remaining northeast republican left to pass bills. A republican victory in either the house or senate would halt many of Obama’s iniatiatives, which much of Wall St. calls big goverment programs. This may bode well for large caps and even penny stocks.
Many also can remember that the republicans at times held both the house and senate under President George W. Bush. That period led to a major downturn in the market that most of us still remember. This is why historically, the market has done better when we have gridlock in Washington. It doesn’t matter whether the democrats or republicans are running things, Wall St. essentially likes neither party to make the decisions.
Many experts feel that the market will rally if the democrats lose the house. Generally, there are specific sectors to watch when a political event happens. This is different, in the late 1990′s, technology stocks outperformed the stodgy old blue chips, but those blue chip names like General Electric (NYSE: GE) still did well. In other words, gridlock leads to broad based rallies and investors who are up in there core stock and mutual fund positions tend to become traders when they have gains. This could lead to the emergence of several hot penny stocks on the OTCBB.
Right now it is too early to tell which microcaps will emerge if the gridlock theory comes to fruition. But it is never too early to prepare. Right now is a great time to research this theory and you have until November to do so. As of now just scan the internet, watch cable news and read as many large cap and penny stock newsletters as you can find. Remember to stay tuned to our blogs and penny stock alerts, because being informed is the key.
Many people are attracted to penny stocks because of their potential to provide massive gains. However, many novice traders and investors often get involve in speculative investments without having a strategy set in advance. People often look to buy hot penny stocks because of their low price and the ability to own large share amounts with only a small amount of capital. Penny stock buyers should know that trading strategies should be the same, regardless if you are buying Cisco Systems (NASDAQ:CSCO) or a mining stock on the OTCBB. The amount of capital is irrelevant, because you should have an entry and exit plan on every trade. Remember it doesn’t matter whether you invest 3k or 50k.
Please keep in mind that not just any trading concept will work. Sometimes having no plan might be just as good as having no plan at all. So here are some simple suggestions that should keep you out of trouble and hopefully be cornerstones in your thought process.
Always trade small until you achieve a certain comfort level. Being comfortable as an investor is being consistently profitable. So take your time, good ideas come around all the time. CNBC, the Wall St. Journal and various trading and penny stock newsletters have winning trades often. So don’t be afraid to miss one before you gain the necessary experience. Trust me other good ideas will come again.
Another common mistake made by traders and investors is using margin. In my opinion, trading on margin is not only extremely risky because you can actually lose more than you initially invested, but it also alters your mental psyche during the trade. So never put a stock like General Electric (NYSE:GE) on margin to buy a penny stock. No matter how good it sounds.
You should also look for solid companies. While it is not common for a company trading on the OTCBB to be profitable, you can look for other signs. Start with looking for companies with revenues or contracts. Especially companies that have aligned themselves with major corporations or governments. This often validates a companies prospects.
Finding liquid penny stocks can also be somewhat difficult. It is human nature to want to be first and buy a stock while everyone else is sleeping. But this is usually a losing game. A simple rule to use is to never invest more than half of the average dollar volume that a stock trades. For instance if a $1 stock only trades 10 thousand dollars in volume on average, don’t buy more 5 thousand dollars worth. Novice investors don’t realize that small orders can move some illiquid penny stock names 5% with ease. This is part of building an both an entry and exit strategy. Not using market orders is the best way to avoid getting a bad execution.
The last point is another common mistake to avoid. Don’t buy stocks that gap up. Many professional traders and hedge fund managers “fade” or counter trade gaps. Market makers have made fortunes short selling capitulation moves to the upside in penny stocks. Think about the last time you bought a gap up and the stock went down quickly. Did you ever stop to think of who was on the other end of the trade ? Why do you think these trading firms are in business ? To lose money. So if you really like a stock that gaps up, put a limit order in below and wait for it to retrace.
Lastly, do your research. We always tell you to be prepared. Having knowledge about a company is not a guarantee to a profit, but it surely eliminates bad investments. The internet has leveled the playing field between retail and institutions to some degree. So take the extra hour and simply browse the web for PR’s and financials. Remember, preparation is a key to avoiding rash decisions.
After the close today Cisco Systems (NASDAQ:CSCO) will reports its fourth quarter earnings. Wall St. is expecting Cisco to earn 41 cents a share on 10.87 billion in revenues. Many analysts feel a modest surprise to the upside is probable.
Most traders and fund managers that Cisco typically reports in earnings that are in line or exceed estimates by a penny or two. They also know that what is said Cisco’s conference call is often a major market mover. This is why the street will be closely monitoring well respected CEO John Chambers remarks on Cisco future and the general condition of global demand for technology products and services.
We anticipate that cable financial news pundits will be dissecting Chambers speech tonight and spotlighting the highlights looking for a catalyst for the markets in the short term. Cisco is the largest manufacturer of computer networking equipment in the world. Their earnings and guidance often give the market a clearer picture of near term IT spending.
How will Cisco’s earnings impact penny stocks? As we know the OTCBB is made up of many different biotech, biopharma and mining penny stocks. However, there is a large presence of technology stocks on the exchange as well. If CSCO beats estimates and raises guidance, the probability of a short term tech rally is high. Look for penny stock newsletters to hitch their wagons on hot penny stocks that are related to IT infrastructure spending.
For some time now, there has been an opinion from Wall St. that large cap tech names like Cisco, Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) are insanely cheap. One way or another, tonight’s conference call will paint a clearer picture. So form your penny stock list with technology names and be ready to act if you feel a tech rally can benefit one of those microcap names.
In past we have written blogs on zombie stocks like Lehman Brothers (LEHMQ.PK) and Washington Mutual (WAMUQ.PK). Most zombie stocks eventually go to zero because they are usually close to or in bankruptcy.
However, the low priced stocks are usually some of the most active and liquid names in the entire stock market. Today though, it seems Fannie Mae (FNMA.OB) seems to have taken the zombie throne. The volume in shares of Fannie Mae has been insane. The average volume in the stock for the last three months is just under 30 million.
Despite many experts and analysts predicting that Fannie Mae will eventually go to zero, some short term traders have done well in the shares. Even though Fannie Mae has household name, most of the volume comes from retail investors. There may some hedge funds that trade the stock, but institutions usually stay away from situations like FNMA.
The mortgage and housings markets are improving, but are still shaky. The government’s huge stake in both Fannie Mae and Freddie Mac are evidence of this. But common sense tells me that there is a need for a company like Fannie Mae to exist. I think this rationale draws some people to the stock. The holders are basically playing a lottery ticket and hoping for some changes out of Washington. Some sort of proposal could be in Congress by January.
In the meantime, there will be several days to buy and sell these hot penny stocks. The strong volume should continue into the later part of the year, in anticipation of a final decision. Seasoned penny stock flippers should benefit play volume surges and technicals, but others will surely be big losers.
We mention risk often in our blogs and how to deal with it. If you decide to day trade FNMA remember to take profits and implement a risk/reward ratio into your trade. Remember that there are people who make a handsome living trading liquid low priced penny stocks.
If you are a longer term investor and you decide to take a flier on Fannie Mae, only invest what you can afford to lose. The best mentality is to act as if the investment is a lottery ticket. Because that’s what it is. Just remember, that trading zombie stocks is like playing musical chairs. Just be sure to be sitting in one when the music stops.
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Everywhere you go, whether it’s a Little League game or a cookout, people are whining and moaning about the market. It is especially true of the casual investor. Many of this group is also predicting some sort of crash or sharp fall in the market in the near term. My memory tells me that some of these same people were very upbeat during the monster tech rally of the late 1990′s. Others in this group also felt comfortable buying stocks and mutual funds when the market already rallied off of the bottom during our last big decline in 2009.
Stock Futures are up this AM, due to jobless claims falling to 473000. This number wasn’t great, but it was much better than the week before, when claims were over 500000.
As we have mentioned many times in previous blogs, takeover fever is back. Potash and McAfee lead the headlines and HP jumped right over Dell’s previous bid for 3Par. The common denominator in all of these deals and for that matter proposed deals, was the cash takeover.
Today a news story came out that was somewhat disturbing. Mutual fund giant, Fidelity Investments reported that a record number of hardship withdrawals were made from retirement accounts. Also investors who borrowed from account hit a 10 year high.
Many political pundits and pollsters expect the Republicans to at least take back the house, and possible the senate this November. Some are even calling for a repeat of the “Republican Revolution” that happened in 1994, where republicans steamrolled the democrats with anti-Clinton fervor. However, some say this drove the left leaning Clinton administration to the middle and set the groundwork for the historic market rally of the late 1990′s.
After the close today Cisco Systems (NASDAQ:CSCO) will reports its fourth quarter earnings. Wall St. is expecting Cisco to earn 41 cents a share on 10.87 billion in revenues. Many analysts feel a modest surprise to the upside is probable.
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