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Tuesday, December 07, 2004
Market Recap
The Grinch showed up on Wall Street today and spoiled the party. The Santa Clause rally came to an abrupt halt, and stocks could not find any buyers in the afternoon. The Dow was down triple digits, losing -106 points. The NASDAQ fell -36 points and the S&P lost -13 points. The sell off was on high volume which is never good news. We started locking in profits in our portfolio and raising cash by closing out positions that still had good charts but were victims of this market pullback. Even strong stocks cannot hold up when everyone wants out of the market, and today looked like one of those days. Most stocks I watched sold off on 2x volume or more and that is not a good sign. Most charts are still intact for now, but these pullbacks will come in bull markets so it is best to just get out of the way. Let the stocks pullback and get back in near support levels or when the stocks set up again.
Because of today's surprisingly negative market action, I have updated many comments on the bulletin. Please read the updates because limit prices have changed or are no longer valid. Today's down volume has me concerned and we need to sit back and watch the action unfold instead of being 100% long. We closed out many positions because of this reversal and now we need to be patient and wait for the charts to set up again. The markets were over bought after this recent advance and a pullback was due. However, I did not think the pullback would be of this magnitude and with this much volume. We are down to just eight open long positions and have plenty of cash to be put to work when the time is right. We have had a very good month of trading so far and December is only a week old so we can afford to sit tight and be patient for a few days.
Reverse Stock Splits
I read an article on reverse stock splits a couple years ago and I still have the link saved. I refer back to some old articles I like once in a while, and as the topic has been discussed on our message board, I would like to make a few comments. I happen to agree with the author of this particular article concerning reverse stock splits over the long haul:
http://moneycentral.msn.com/content/P32972.asp
However, reverse stock splits can provide temporary gains if played correctly for a short term trade. There have been big gains from stocks that have had reverse splits. Some examples are GOAM, ADSX, RCO, PCLN, and INSP. Not all stocks that have a reverse split will soar but these examples have. Why? One possible is reason is the reduced float causing the shortage in available shares.
Many stocks have been hammered down to new lows over the three year bear market between 2000 and 2003. When a stock gets hit hard enough, the biggest risk they face is having their stock delisted from its current exchange. This can spell doom for many companies as investment bankers often look at stock as collateral when considering lines of credit. They will often withdraw funding or raise the borrowing rate on a company if they feel the company is a risk. One way to prop the price of the stock back up to prevent delisting and continue trading on their current exchange is the reverse stock split.
If the company has a huge hoard of cash, another option maybe a stock buy back. This can do great things for a stock. The float, or the number of available shares for trading, can have a significant impact on the movement of a stock. If shares are being bought back by a company, they are effectively pulling shares out of the market and reducing the float. The problem here is that companies whose stock is getting hammered down often do not have a huge cash hoard. The cash would obviously represent value, and it would have to be coming in from earnings. Announcing a stock buy back is a way of possibly boosting the stock price, but if they have no cash, they cannot buy back stock. Companies with earnings and value do not often trade below $1.00. Most of the companies with their stock trading below a $1.00 have no earnings and no cash to purchase shares.
The other alternative for these financially strapped companies is a reverse split. By doing a reverse split, the price of the stock is increased by the number of times as stock is reversed split. If you have 10,000 shares of a .50 stock that announces a 1 for 10 reverse stock split, you will own 1,000 shares of a $5.00 stock after the reverse split. It is like taking five $1.00 bills and changing it for one $5.00 bill. You still have the exact same value that you had before but now you have four less bills in your wallet, the value has neither increased nor decreased.
Many people think a reverse split is negative, but the positive side of a reverse split is that a company remains listed on its current exchange and also reduces the trading float of the stock. The smaller the float, the bigger the supply and demand becomes. The negative side of a reverse split is the company's fundamentals. If their fundamentals were solid, they would not need to take such action. Stocks can go either way after a reverse split. The lower float can propel a stock up if momentum gets behind it. It also has more room to fall back down to below $1.00 again if it looks like the company is in trouble fundamentally and at risk of bankruptcy. Trading stocks that reverse split is very risky and carry an even greater risk over the long term. You be the judge before you trade any stock that has announced a reverse split.
Bulletin and Charts
With today's market action, there are no charts to show that have set up for advance, and I will not add any new stocks to the bulletin tonight. A day or two is needed to sort out this carnage today to determine if it is more than just a pullback. I think that the bull is still safe but the down volume today maybe more than just a routine bull market shakeout.
A Changed to Our OTC BB Watch List
We are going to start adding the closing price the day we list OTC BB stocks on this commentary. It is a little different then the Bulletin stocks. Bulletin stocks are listed as the open price the day after they appear on the bulletin. Since OTC BB stocks don't trade after hours or before the market opens, they will be listed at the price they closed the day they were added to our list. These stocks will stay here until the charts indicate they should be removed, this is so we can better monitor their progress.
CYME - 2.45
GNAC - 1.32
GPSN - .19
PRCY - 1.44, up another .17 today on tremendous volume.
ALMI - .34
PYDS - .33
UGNE - 1.80, this is just about ready to move up big.
VSNI - 1.71, keeping it here, after a rest it should move again.
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