The Status of Penny Stocks Told By Three Key Charts

| October 20, 2014

market diceWhat This Penny Stock Chart Means…

Take a quick look at this chart…

It’s the Russell 2000 index (a good measuring stick for small stocks in the market) vs the S&P 500 – which as you know is a group of the largest companies out there.

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The top line – in red and black shows the weekly movements of the Russell 2000.

You’ll notice that smaller stocks were easily beating bigger ones… that is until this summer.

It makes sense… in an economic recovery, smaller stocks tend to do better than larger stocks because of their size… one big order, an increase in business, and/or improvements in margins tend to be magnified at the smaller companies.

So, while in a good economy, small stocks are great… the inverse is also true.

In a bad economy, small stocks will be the hardest hit (and often the first).  They have less of a business to fall back on, not as many customers or products, they don’t have the assets or cash, or even the infrastructure to survive long bouts of economic problems.

That makes small stocks, penny stocks, the Canary in the coal mine.

Penny stocks are the early warning system for investors… and they started giving us warning signs a few weeks back.

Another Penny Stock Chart Telling Us To Be Cautious!

Take a look at this penny stock chart…

RUT-Chart102014

These are the same two indexes – the Russell 2000 and the S&P 500 – as the first chart.  But now we’re looking at them on a daily basis over the last 12 weeks or so.

As you can see since July… the performance of the smaller companies has been falling…investors are selling penny stocks every chance they get.  And they are selling penny stocks faster than the bigger stocks.

It’s a rotation into safety!

It means the market sees small stocks as very risky right now.  The market is telling us there’s a problem.

What’s the Problem In Penny Stocks?  Another Penny Stock Chart…

So, what problem is the market pointing to?

Maybe it’s the economy… or the Fed trying to raise rates… maybe its economic weakness in Asia or Europe… or Ebola.

I don’t know.

But these charts are important to watch… they are either a warning sign that bigger drops are ahead… or just an indicator that this is a great buying opportunity for penny stock investors.

Which is it?

Take for example the market breakdown in 2007…

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As you can see clearly, in July of 2007, penny stocks started to UNDERPERFORM the market… it was a clear sign that something bigger was at issue.  It was a warning sign to get out.

But that’s not always the case…

Often times these selloffs rebound quickly with the Small cap stocks outperforming the markets.

What You Need To Do About These Penny Stock Charts

I know you’re desperate for answers… is this the start of something big… or a buying opportunity?

For me, it’s a buying opportunity.

Why?

Because the last time we had a major market correction as bad as the one in 2007 – 2008… it was 1929.  Huge market Depressions like that don’t come along very often.  So, I’m playing the odds.

I’m sharpening my pencil and starting to figure out what I want to buy.

I’m going to watch for the divergence between the two indices to close back up… and when I see that starting to happen, I know we’re back on the right foot!

However, I’m still keeping my eye on these markets…

If Ebola breaks out in the US, or Russia invades Europe, all bets are off.

Profitably Yours,

Penny Stock Research

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