Tuesday, March 11, 2014

Pump and Dumps in Vogue

Daytraders are now excited.  In most cases, chasing momentum in OTCBB, pink sheets, and small cap speculative stocks usually lead to losses.  Without any fundamental backing, without a bigger sucker bidding the stock higher, you don't get parabolic moves that sustain for a long time.  But in certain special periods of time, where speculation is rife, and daytraders eager and bold, you can get big bubbles in these pump and dumps.  What would usually pump for 2 or 3 days, and die out, go on for 1 to 2 months.

We are in one of those special periods of time.  The apex of the bubble.  2014 has been a miniature version of early 2000.  The daytraders are being rewarded for chasing these pump and dumps.  Daytraders have now been conditioned to buy small cap momentum stocks, expecting it to go higher in the weeks ahead.  And if they are wrong, the consequences are not that severe, because you have a huge group of speculative traders looking to buy dips.  No, this is not like BTFD for the S&P 500, or for big cap legitimate stocks.  They have brought in the pervasive paradigm of risk free dip buying to the small cap space.

In 2000, there was a stock with a huge parabolic run, ticker symbol SCON, which was hyped up by retail traders from 6 to 114 over 2 months.  It took out a lot of professional traders, many who specialized in short selling.  Over a period of two weeks, it went from 13 to 114, where it topped out.  After topping out, it went back to 14 in 5 weeks.

What is going on in the fuel cell space is very reminiscent of the early 2000 internet era.  In fact, PLUG was one of the stocks run up huge in early 2000.

I don't want to extrapolate the activity in the speculative small cap pump and dump space into the overall market.  It doesn't really help in timing market turns.  But it does point out the general speculative fever going on right now, which is a symptom of overexposure and overexuberance towards equities in general.

I am neutral on the market, it looks tired, but doesn't go down.  When it does go down, the trigger will be China.  China is to the stock market as Europe was to the stock market in 2010.  I do think China will crash sometime in the next 6 months.  The weakness in Chinese stocks is remarkable.   It has gotten to a point where investor flows into emerging markets will not come back unless you get a huge rally, which is doubtful.  The fundamentals are horrible in China, and it is not corporate defaults, or the disappearing implicit guarantee for corporate bonds.  It is a gigantic real estate bubble that is on the verge of popping.

No comments: