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Blog : Can Penny Stock Investors Trust the Bull?
by John Whitefoot on October 2nd, 2009
With investors still spooked about the ongoing validity of the current bull market, the best way to pass the time is to hunker down with the new broadcast television season. The recession blues came to life this week in Kelsey Grammer’s new (and sure to be short lived) weekly comedy “Hank”. Grammer’s character plays a (not surprisingly) pompous, laid-off Wall Street CEO forced to stay home.
While I have great fondness for Cheers, and Frasier…Hank makes me want to get off the couch and long for a commute to Wall Street. Sure, virtually every investor says they want to get back into the market, but the truth of the matter is, most are too skeptical to.
But why? Despite the best back-to-back quarterly gains in the U.S. market since 1975 and a 56.2% rise in a 6 1/2-month span…the bearish penny stock investors are wondering if the good times can last. Those bullish penny stock investors on the other hand are wondering why the current rally has garnered so little respect.
“Small investors almost always treat new bull markets with scepticism,” said one money manager. “They have been burned, so they gravitate toward safe investments – bonds – and will just stick their toes in the water as far as stocks go.”
But really, who can blame them? Given all the dire warnings about another Great Depression, it’s no wonder investors of every ilk are a little cautious about coming in off the sidelines.
“This is one of the most unloved and disbelieved bull markets that I can remember,” said another money manager and market historian.
The skepticism, he noted, comes despite mostly encouraging news that points to an economic recovery and rebound in corporate earnings. And yet...uncertainty abounds even though the Federal Reserve declared that the recession is likely over and housing sales appear to be on the mend.
Even upbeat comments from the bulls have been unable to assuage ongoing fears. Mind you, these may be the same bulls that only saw the current market crash in their rear view mirrors. A healthy dose of skepticism is not out of line.
On the other hand, there is a growing chorus amongst the bulls who say the right ingredients are in place for a continuation of the stock rally. That ingredient is that the economy is in recovery mode – which historically has been a good time to own and profit from stocks.
The bulls also note that stocks have a history of climbing higher when most people are calling for the markets to decline. That may be true historically; however, if there’s one thing I learned about the current recession…it’s that it didn’t follow any of the past predictors. I’m not so sure I’m going to bank on the tried and true historical trends going forward. At least, I’ll tread lightly with beady eyes.
Yes...the market has experienced unprecedented gains since the beginning of the year…and this has given the bulls reason to cheer. It’s also important to remember that Japan’s Nikkei stock average posted six 20%-plus rallies and four 50%-plus gains since its stock bubble burst in 1990; yet the index is still down more than 70% from its peak.
Perhaps, Peter Schiff, President of Euro Pacific Capital, is correct when he surmises that the U.S. is really just experiencing a "rally in a bear market."
Third quarter earnings will be key for the markets going forward. Analysts may base their investment decisions on different indices and algorithms but lowly penny stock investors base their investment decisions on more traditional market drivers…such as revenues and corporate profits.
It's common for earnings to be depressed coming out of a recession, so investors will be more focused on what companies say about the business outlook. Investors will also be watching to see how companies earned their profit (or cut losses).
In past quarters, some penny stock companies saw their bottom line improve because of cost-cutting and job cuts. This quarter, penny stock investors want to see clear signs that business is improving, said one market researcher.
So…are we experiencing a bull within a bear rally, or is this the real thing? If that were an easy answer we’d all be one or the other. Unfortunately, the Federal Reserve has yet to raise its staff and declare the recession over; virtually over doesn’t count.
As we head into earnings season, it’s important to remember that a recession can be, on some levels, a blessing for penny stock investors; as it’s much easier to spot a strong company without the background noise of speculation and a strong economy.
The benefit of hard times, another analyst noted, is, “that companies get hurt for inefficiencies that they laughed off in better times. A recession means general fat trimming for companies, from which they should emerge stronger,” and that's good news for penny stock investors.