Penny Stocks and Low Volume Markets


Why Panic ?

penny stocks buyback 300x198 Penny Stocks and Low Volume MarketsEverywhere 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.


 

12:31 pm | | Tags: , | No Comments »

Genzyme Rejects Bid From Sanofi-Aventis

Are Biotechs Too Cheap?


genz genzyme 300x176 Genzyme Rejects Bid From Sanofi AventisThis morning people woke up to shares of Genzyme Corp. (NASDAQ:GENZ) trading sharply higher in pre-market trading. On Sunday, Genzyme received an $18.5 billion offer from Sanofi-Aventis (NYSE:SNY) which comes to $69 per share.

The bid was rejected by the Genzyme Board despite their recent manufacturing issues. This decision could send a sign that many bio pharma stocks, including Genzyme are undervalued. We will probably see some increased volume and news flow early in the week from this sector. Especially with the mid and large cap names.

This M&A activity also bodes well for some of the unknown and under followed names on the OTCBB. Unlike most other sectors, excluding mining penny stocks, tiny microcap biotech and bio pharma stocks do get funding from larger companies from time to time.

For instance, giving a potential hot biotech penny stock $5 or $10 million dollars in R&D money is a small risk to take for a multi-billion dollar corporation looking for a new drug that could potentially become part of their pipeline.

While I can’t say for sure, it is probably safe to say that you will see some of the top penny stock newsletters writing about this trend in the next few weeks. Please keep in mind that the vast majority of biotech and biopharma stocks are very risky, and shouldn’t be owned by the feint of heart. However, this group has offered some investors some of the most massive gains.

So if you decide to buy one these biotech names of of a penny stock list, make sure you invest small. Also, when investing in a biotech always check their cash position and burn rate. These two numbers will tell you how much money the company has and how quickly they go through it.


 

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Buying Before Bernanke


Does it Make Sense ?

penny stocks ben bernanke1 300x180 Buying Before Bernanke
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.


 

12:10 pm | | Tags: , | No Comments »

Jobless Claims Not That Bad

Bounce Time?


jobless claims penny stocks 300x201 Jobless Claims Not That BadStock 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.


 

1:51 pm | | Tags: , | No Comments »

Is the Bond Market the Next Bubble?

Would that Signal a Bottom for Penny Stocks?


investing bonds Is the Bond Market the Next Bubble?Every market has a bubble. Those bubbles exist, whether the market goes up or down. Because we have all heard the saying that “There is a bull market somewhere”. Right now that bull market is in the bond market. Investors have been drawn to this asset class for many different reasons. For some it was the “flash crash” for others it’s been poor returns in equities. The poor economy, and high unemployment are other factors in the interest
in debt market.

This interest is so evident that it’s basically flattening the yield curve and the 10 year yield is nearing the January, 2009 low. Investors are also pouring money into debt mutual funds at alarming rates. My sense is that this could signal a bottom in the equity market. History has shown us time and time again that when retail investors pile into a sector or an asset class, it’s probably near or at the top. It doesn’t matter whether it’s municipal bonds or mining penny stocks. If Joe Public is over weighted a shift the other way has usually been around the corner.

Now why could this be a contrarian indicator to go long microcap stocks ? Well it’s simple. Part of the reason for the light volume in the market has been the shift to bonds. For example if Investor A buy an equity mutual fund. That mutual fund will trade and add volume to different exchanges. Now if that same investor moves those equity funds that were reserved for risk into a high yield bond fund for instance.That simply takes volume away from exchanges like the NYSE and that lack of volume trickles down to the OTCBB. It’s simple macroeconomics.

Since many of us have lived through the internet bubble and others too. You probably get the drift. If history repeats itself, investors will not see the returns that they are looking for in bonds. As evidenced in the past, many of these same investors will eventually shift this money back into the equity market. To me this provides some buying opportunities in the area of penny stocks. The lull in volume has impacted many of these tiny companies. Some have become relativly cheap based on nothing other than lack of interest. Keep in mind that heavy volume is the way low priced companies turn into hot penny stocks. Unfortunately, some of the funds that provide that volume are tied up in bonds. This call might be a little early, but eventually, those funds should come back to stocks. Just be patient.


 

2:10 pm | | Tags: | 1 Comment »
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