In my many years of trading penny stocks, I have come to notice certain trends that seem as certain as death and taxes. I go into great detail about these trends in my book The Little Black Book of Microcap Investing (available at Amazon.com). In this article, I will present you with a few bits of information concerning trends that I see developing now (April 2007).
First and foremost, the penny stock market seems to follow the NASDAQ. Compared to NYSE investors, NASDAQ investors seem apt to assume more risk. When times are good on the NASDAQ, it is my theory that many NASDAQ investors will transfer some of their new found profits to the penny stock market (OTCBB and Pinks). This trend is evident when you compare the OTCBB total dollar volume to the rise and fall of the NASDAQ. When the NASDAQ is doing well, total dollar volume on the OTCBB rises. When the NASDAQ falters, total dollar volume on the OTCBB takes a nose dive. For example, compare the NASDAQ and OTCBB in FEB-MAR of this year. From mid-FEB to mid-MAR of 2007, the NASDAQ had a sustained downward trend. During this same time, OTCBB total dollar volume dropped nearly 20%. I have researched this trend over many years and have come to the conclusion that the NASDAQ is a great predictor of OTCBB activity.
Now that you know about the NASDAQ influencing the OTCBB, what should you do? If the NASDAQ is falling, should you sell your OTCBB stocks or do you use the downturn as an opportunity to acquire OTCBB stocks? I discuss these situations in The Little Black Book.
So, what is the Penny Stock market going to do now? Well, since mid-March 2007, the NASDAQ has seen a sustained upward trend. If the NASDAQ-OTCBB continuum holds true, NASDAQ investors may soon begin to pump money back into the OTCBB. Total dollar activity on the OTCBB seems to lag a few weeks behind the NASDAQ when things are on the upside. But beware...over the past few months, the NASDAQ has seen a few days of sharp declines. When the NASDAQ tanks, NASDAQ investors tend to liquidate their riskiest positions. You and I both know that this means penny stocks. You would be wise to keep an eye on both markets!