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Blog : Wag the Penny Stock Dog
January 11th, 2007
The penny stock market had felt pretty quiet in the last quarter of 2006. Trading volumes were lackluster, volatility was muted, and overall speculation was weaker than usual.
The penny stock market was simply a muted version of what was going on with the larger stocks. If large stocks were quiet, penny stocks were dead. If large stocks were weak, penny stocks were motionless.
Then tax-loss selling reared it's ugly head, and drove many shares deeper into the holes they had made for themselves in recent months.
Once 2007 rolled around, things picked up across the board. Large cap stocks and penny stocks came back to life, and overall activity levels returned in spades. Speculation rose up once again, trading activity ramped up, and traders swooped down to scoop all the incredible penny stock bargains that tax loss selling had created.
In fact, there seems to be an increase in life across all sorts of metrics; real estate, retail shopping, investment activity, and others.
I expect the new found life in the penny stock markets to continue well into 2007, and to play out in the same pattern that they have every four years (on average) since the 1920s. Penny stocks are the tail on a dog named Blue Chip. It goes something like this:
Phase 1: The big stocks do well. Money flows into them, in favor of other investment types. By being overlooked, penny stocks represent tremendous value.
Phase 2: The big stocks slow down in terms of share price growth. Investors take their gains, and start looking down the chain for the next opportunity. They buy mid-caps. Penny stocks start to creep up in price, unnoticed by most investors.
Phase 3: Mid-caps do well, out-perfoming big stocks. Once these mid-caps have produced strong gains, investors take profits. Emboldened by their results, they start scaling into even higher-risk, higher-reward investments. They look to micro-cap stocks.
Phase 4: Penny stocks have their day in the sun. Although, it isn't really a day. It's more a period of six to eighteen months.
Currently we are in Phase 1. There is absolutely no better time to be getting into the right penny stocks than the next couple of years. Last time we a good Phase 4 was leading up to the dot com bubble. Don't let that scare you - you can make a fortune, as long as you're not the one left holding the hot potato.