Pay Close Attention to the Leaders, Now That the Pennies Are Taking Off
A favorite indicator of William O'Neil was penny stock trading activity. What's it saying about the market now?
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I can’t help myself. I have to start with the penny stocks again.
As a refresher, in January, we saw this absolute nonsense where penny stocks –and I am not talking stocks that trade at a dollar, I mean real penny stocks—had taken over the volume on Nasdaq. Once the market started down, that subsided. All that speculation melted away.
It began in earnest again this week. On Monday, we saw Nasdaq trade over 10 billion shares with one stock about twenty percent of the volume. The stock was a Chinese crypto stock that closed the day Monday at thirteen cents.
Tuesday, we had Nasdaq volume at just over 13 billion shares. Let me report that on January 7th, when this nonsense started, Nasdaq traded just a bit over 13 billion shares. Tuesday saw three stocks account for nearly six billion shares. I’m not very good with math, but that looks like it is nearly 50% of all volume on Nasdaq.
Two of those stocks are literally penny stocks. One closed at one cent and the other at two cents. The third one, that traded the least volume of the three, was Weight Watchers, which closed at 73 cents and traded just over half a billion shares.
Intuitively, I know this is not healthy when penny stocks are half the volume, but let me instead quote William O’Neil, of Investors’ Business Daily fame. As an aside, early in my career, I used Mr. O’Neil’s Daily Graphs chart books to complement my hand-drawn charts. Here’s what Mr. O’Neil said on the subject:
“If the original market leaders begin to falter, and the lower-priced, lower quality, more speculative stocks begin to move up, watch out! When the old dogs begin to bark, the market is on its last feeble leg.
…Among the telltale signs are the poor-quality stocks that start to dominate the most-active list on market ‘up’ days. This is simply a matter of weak leadership trying to command the markets.”
In January, we had seen the leaders falter (remember the semis and Microsoft)? So far, we have seen those former leaders act in concert with the indexes, so I would not call them faltering. However, many of them will report earnings this week, so we should pay close attention to how these leaders act because we have one leg in place in terms of the speculative low-quality stocks.
Away from that, not much changed as the market continues to do a lot of churning around. It’s been six straight up days for the S&P, so we should not be surprised to see a down day on Wednesday. In fact, it would be almost standard. I don’t think an up day makes the market any more bullish, just as a down day doesn’t make the market any more bearish. It’s all just part of a chop for now, working off that overbought condition.
