I've spent a lot of time over the last eight weeks [June 2006] reading articles about how the market is doing, trying to figure out if it really affects people who buy penny stocks.
Are we in a bull market or is a bear market coming? Or is the recent bounce just a dead cat?
The dead cat bounce is a short-term rise in a trend that is going down. In the world of investing, there's a (relatively) old saying that even a dead cat will bounce if it's dropped from a high enough height.
No matter how you look at it, I'm not sure it even matters to people like you and me who invest in penny stocks.
For example, Japan's stock market went up this week after news that manufacturing and exports had grown. Asia's markets went up because investors were happy about Wall Street's gains on Wednesday.
Strong earnings reports from two bellwether stocks gave investors in penny stocks hope that rising interest rates wouldn't kill profits. One economist said that the recent drop in stock prices was "just turbulence."
It looks like the trouble is still going on this side of the pond. Thursday, U.S. stocks were mostly flat to down because the market was taking a break because of higher oil prices and bad economic news. So, what should we think? Is the market going up or down?
How does the market look in general terms? When it comes to stocks, the S&P index is only up 0.3% for the year, while the Dow is up 3.4% and the NASDAQ is down 2.9%. Not sparkling data.
But for people who buy penny stocks, the recent roller coaster ride that has left many experienced blue chip investors dumbfounded is nothing out of the ordinary. We know that penny stocks are often risky and hard to predict.
Even though a penny stock may do better when the market is doing well, in general, it moves to its own beat. Why? Few investors buy penny stocks because they don't want to or can't do the work that is needed to accurately predict what will happen to these shares.
By their very nature, it's hard to know what price a penny stock share should be trading at, and traditional financial ratios and industry comparisons aren't usually good ways to figure out how much a penny stock is worth. Penny stock investors often see big percentage gains and losses in just one day.
So, really, bull, bear, or cat, a day at the computer screen for penny stock investors is the same as any other. Even if the work is fun, it's not easy. About 3,300 of the 14,000 public companies in the U.S. are called "penny stocks" and trade on the NASDAQ's OTC Bulletin Board.
Their visibility is low, and you probably haven't heard of their CEO or institutions that support them. Even though they are very risky, the ones with the most potential have focused business plans and strong positions in niche markets. And right now, Wall Street doesn't know about them.
So, what do you do in a market like ours, where nothing is certain? Keep using the same rules you've always used to find that undiscovered penny stock. And have fun with the changes.
