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Thursday, June 30, 2005
Market Recap
As every one expected, the Federal Reserve raised rates by .25 bases points today. This, however, is not what caused the sell off in the markets today. The sell off came when the statement that “measured pace” would continue. Wall Street wanted to hear a clear statement from the Fed that rate hikes may be coming to an end soon however, they did not get that phrase in the statement following the announcement. This is the 9th rate hike in as many meetings and brings short term rates up to 3.25%. You will recall a couple of weeks ago that we did a commentary on the business cycle and one of the things we discussed was the yield curve. With short term rates going up and long term rates flat, the yield curve is flattening out. If both long term and short term rates are the same, it cannot be good for stocks and today, stocks moved to the downside as heavy volume came in after the FOMC meeting. The DOW dropped 100 points, the NASDAQ lost 11 points and the S&P lost 8 points.
Penny Stock Heaven or Hell?
Stock prices fall into two basic categories: penny stocks (stocks trading under $1.00) and pretty much everything else. To some degree, you can lump stocks under $5.00 into the penny stock category as well because most institutional investors will not touch these low priced stocks.
Lower priced stocks can be very seductive to some. Not only can you buy large numbers of shares, but when the stock does move, they can have very large percentage gains. However, that works both ways and there are additional risks with lower prices stocks. Typically they have lower volume and are thinly traded which at times can get you stuck or trapped in a stock. This situation can negatively impact your trading.
Personally, I feel much more comfortable trading a stock that is above $10.00. Generally, stocks which carry low share prices tend to be more risky. They also tend to be lower priced due to lack of interest from the professional investment community. Remember what we always say, “follow the smart money”. If we trade in these smaller stocks, you can bet that it is the public that is in them and not the big institutions. They simply can trade these lower priced stocks because they trade millions of dollars at a time and they just cannot get in or out of these lower priced stocks in the massive quantities of volume it would take to do so. Plus, the smart money does not want stocks that are in financial trouble and these stocks most certainly are, or else they would not be trading so low.
Therefore, we know just by this reasoning that there is no so called “smart money” in penny stocks. If you chose to buy these stocks, you are not in with the smart money but rather following the small public trader. This is not to suggest that there are not good quality low priced stocks, certainly there are. However, you must make sure that there is enough liquidity in the stock that you purchase so that you can get out when you want to.
Quality Not Quantity
In the end, you usually stand about the same chance of seeing a higher priced stock move 10% as you would seeing a lower priced stock move 10%. The reason it all evens out is because there are literally thousands of lower priced, thinly traded, penny stocks and trust me, they do not all go up 50% in a day. Some go down by that much and some never move at all. Only a select few in the penny universe will make those tremendous percentage gains. Keep this in mind: What are the odds of you being right when there is such a wide selection and so few move? True, if you keep playing them long enough, you may hit a home run but how many losses are you going to take in the meantime and how much money are you going to have tied up waiting for it to move?
There tends to be a little more safety in trading in the higher dollar stocks. Penny stocks can and do sometimes produce amazing short term gains, but unless you really understand the risks associated with these lower priced and often more thinly traded securities, stick to more "name brand" stocks which tend to trade at higher per share prices.
We have an OTC bulletin on the site but rarely do we ever send buy alerts on them. There is a reason for that. We do not want our members to be at risk. Sure, you can set aside a small portion of your portfolio funds for this purpose but certainly do not risk large amounts of your portfolio balance on these risky plays. The next time you think about making a penny stock trade, ask yourself this question: “Would any of the big institutions want to buy this stock?” If not, why should you?
Reminder
The markets are closed on Monday for the 4th of July holiday. There will be no bulletin on Sunday. The next bulletin will be on Monday.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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http://stockcharts.com/def/servlet/Favorites.CServ...
Thank you all for voting.
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