Confident Investors Boost Penny Stock Index

by John Whitefoot - Date: 2007-03-14 - Word Count: 605 Share This!

Penny stocks, those little gems of companies that can deliver startlingly good returns regardless of what their large cap peers are doing, have been performing exceptionally well these past few years.

And yes, 2007 may still be in its infancy, but if the first month is any indicator, the stock markets are in for an interesting ride.

Typically investors watch January's numbers fairly closely, as there is a pretty strong correlation between market performance the first five days and the direction of the markets for the entire year. The correlation has even been ever-so-cleverly named - the January effect.

If the S&P 500 gains the first five days of January, the market as a whole is often positive for the year - at least in 85.7% of the cases.

The first five days resulted in the S&P 500 index closing down by only 4 points. So are we to expect a flat or down year? Or will the 2007 ‘January effect' buck the trend? If you're a penny stock investor, you're use to bucking the trends. And will continue to do so.

It seems too that most investors are turning their backs on the ‘January effect', at least for now. Wall Street vaulted higher mid-week after profit reports from Yahoo Inc and Sun Microsystems restored investors' confidence in the tech sector.

Penny stock investors have been watching the recent quarterly results closely, hoping that ongoing profit growth will help drive stocks higher following a sharp run-up in 2006.

The Dow climbed higher Wednesday to 12,621.77, surpassing a record close of 12,582.59 set on January 16. It was the Dow's 26th record close since the blue chip average began its run-up at the start of October. The Dow also reached a record intraday high of 12,623.45.

It's not just small cap stocks in the U.S that are doing well either. Small caps have been performing well overseas. The London Business School/ABN Amro review of small cap performance shows that small caps have been on a remarkable run; at least since the end of the 1990s.

In fact, the article notes that there has never been such a sustained strong run before, at least according to the data, which dates back to 1955.

Last year was the fourth consecutive year in which the small cap stocks that the HGSC index follows have risen by more than 20% and outperformed the market as a whole by 5%. The HGSC index tracks the performance of the bottom 10% of stocks in the main UK market, as measured by market capitalization.

Taking a closer look at penny stocks, it's plain to see that penny stocks have been on a tear since early November. On November 9, the penny stock index (found at hit a low of 10,880 and on January 19, the index hit a new high of 12,109. That's a three month gain of 11.29%.

Penny stocks have also been performing well since the beginning of the year. 2007 may only be four weeks old, but the penny stock index has already climbed 384 points, or 3.2%.

Still, if there's one thing the stock market has taught us, it's that the party cannot last forever. On the other hand, we also know that the party will eventually cycle back.

The trick is figuring out when the peak moment and reversal begins. Being too early can cost you a lot of money. Being too late (read ‘greedy') can cost you just as much, if not more. Ever tried dumping a stock the same time as everyone else is?

In the end, you can't lose money by selling too early. But then, I guess those are the subtle nuances that make penny stocks so much fun.

Related Tags: investing, stock market, investors, penny stocks, penny stock

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