Prolonged market rallies have a way of pulling obscure stocks off the sidelines and getting them involved in the action. It’s the effect of “a rising tide lifts all boats.”
And that’s entirely fine. It’s nice when new names are added to the mix of active stocks.
The market turned higher in March 2009, and since then we’ve seen considerable progress. Tons of little names have entered the fray, paying astute traders along the way (unintentional rhyme).
While I do have some restrictions on what I will and will not trade, I don’t mind trading some of the more obscure names when they’re set up for moves – so long as they exhibit the proper traits:
Size Matters
Dirt-cheap, thin stocks [1] are not worth trading. They carry much greater potential for pain than profit, despite their inexpensive price tags. But growing stocks (price & volume growth, not necessarily earnings growth) are another story. Every big run starts somewhere, right?
There’s often a relationship between ‘unknown’ and ‘underowned’ and that can spell exceptional opportunity. Under-the-radar stocks often times begin to exhibit technical characteristics worth noting, raising interest in them in such a way that they’re the up-and-coming stocks. Naturally, they’re little-known, and that means they’re underowned by institutions (the ones who really move stocks). As they exhibit some staying power, interest in them grows. That brings both price and volume up to tradeable levels, placing them squarely on the watch lists of traders like you and me.
(I’m talking to mostly guys here, so ladies please bear with me on this next analogy. I want these guys to “get it” so they know what I’m talking about.)
Think of that co-ed in college who returned from summer looking far better than the previous semester. What happened? Suddenly she has the attention of many more guys, has more dates, and as competition for her time expands, so does her confidence. Now that she’s being noticed, she’s unlikely to regain the 15 she lost and return to the sweats-with-no-makeup look again. (Nothing against the natural, casual look… just stating that a change is likely to last in this case). She’ll quite likely take care of herself better, and interest in her will be maintained as a result.
Stocks sometimes follow a similar path.
Beware the Flash in the Pan
As the phrase states, “one day does not a trend make.” Therefore, it makes sense to make a stock prove itself – at least for a little while – before taking a position.
The single-day spurt higher on news will bring no-name stocks into view on a regular basis, but most of those are just having their 15 minutes of fame. If what you’re seeing is just a knee-jerk response to a headline [2], there’s limited opportunity and that stock is likely to drift right back into obscurity. Avoid those.
Instead, as a stock begins to earn respect (and attention), watch for the key characteristics that it’s starting to trend: expanding volume, higher highs and higher lows, and a good price/volume relationship. These stocks are much more likely to stick around and offer you multiple opportunities to participate and profit.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast [3]
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