Bigger Picture

I cannot stress enough what a watershed week this is for the Marijuana sector. Notice today”s bigger performers, and the laggards. Can you see any common characteristics?

Many of the bigger performers are double-digit stocks. Meanwhile, the supposed leverage of being a so-called penny stock doesn”t seem to be so beneficial. That”s quite a switch from earlier updrafts in the industry.

This week marks the obvious entry of institutional investors into the fray. Watershed, indeed.

Fiduciary standards generally prohibit the market”s largest participants from buying stocks that are illiquid, unproven, or controversial. Until this year, only one or two in the industry were trading in double-digits. 

Think in terms of the Groucho Marx retort, upon rejecting the invitation to join an exclusive club: “I wouldn”t want to belong to any club that would have me as a member.” The shear size of any one institution prevents it from considering even a single purchase, not when its exposure can represent a big portion of the sector”s liquidity. Now the sector”s market cap has grown so large that it doesn”t need any single institution”s participation to support it.

Marijuana stocks made dramatic upward moves in January as Colorado”s merchants began operating. That attracted a great deal of retail buying. Penny stocks were big performers. This week”s performance among higher priced stocks tells us there”s a new buyer in town. And a new degree of respectability.

I”m having difficulty getting this message board quote out of my mind: “How does FITX go from 11.4 to 6.3 cent in 4 weeks?” Perhaps that”s because newer developments give the quote new meaning.

Yesterday I quoted this when the stock had extended its dip to 4 cents. My point then was that while the question was probably genuine, it was one-dimensional. A price chart going back only two months shows the stock rallying from 4 cents. And much lower before that.

Elasticity. So, one answer to how a stock can fall so dramatically is to review whether it can also rise dramatically. Stock prices are not uni-directional. They are a product of the people trading them. And if those people”s recent history includes wide ranging price movement in one direction, then they are quite capable of producing it in the opposite direction, too. I call this phenomenon “elasticity.”

Not to belittle actor Paul Walker or to exploit his untimely death. But we can learn an otherwise obvious lesson from his tragedy that faster and fastest acceleration can be painful upon decelerating. Take appropriate steps to avoid participating in that stage of ride.

So, what exactly brought the FITX message board quote back to my mind? Yesterday”s close. After dropping intraday to 4 cents, the close recovered to 7.5 cents. After reviewing its message boards, I was unable to find anyone dare questioning how a stock could go from 4 cents to 7.5 cents in 4 hours.

I do. I truly hate “penny stocks.” And a lot of the Marijuana sector”s stocks are so-called penny stocks. To be sure, not all of the Marijuana sector”s stocks are penny stocks. But more than enough to encourage me that the first post of my new blog should make clear just why I hate penny stocks.

So-called penny stocks
are historically ripe for manipulation of one sort, and another. Being
thinly-traded makes their price react more unusually to news, and to buy and
sell orders. Being sporadically followed allows dubious research reports to
trigger undeserved price reactions. Briefer operating histories and lower
reporting standards make their fundamentals less reliable.

Penny stocks
typically don”t track very well to technical analysis and charting, which
depends on the integrity of the price action. Since that is my research
technique — technical analysis and charting — I”ve not been a fan of penny
stocks.

I can”t tell you that I have changed my perspective, or that
penny stocks have changed their spots.
But I began noticing last fall (2013) that Marijuana stocks were different.
Perhaps it is a function of the tidal wave of attention and investors — and
liquidity — suddenly moving into the sector. Marijuana sector stocks that form patterns then behave very predictably.

And please don”t take this personally, but penny stocks can attract a less experienced type of investor. I recently saw this comment on the message board for one Marijuana stock: “How does FITX go from 11.4 to 6.3 cent in 4 weeks?” It actually went to 4 cents the next day, where it had traded less than 2 months earlier. 

That”s how a stock can drop so far, so quickly — by rising too far, too fast. Newer investors aren”t familiar with several universal laws that affect the markets. Gravity, for instance. Or a variation of Murphy”s Law, that states the most surprising moves can extend by a surprising distance, and for a surprising amount of time.

This blog will constantly include investing guidelines, and other rules of thumb. Newer and seasoned investors alike will better understand how to interpret and exploit price action, when not to push too hard into a trade, and when to consider pushing harder.

The first rule of thumb: Get good guidance before trading penny stocks.