Today we are going to deviate from our weekly market update and cover the topic of momentum stocks, or as we refer to them at the forecast, casino stocks. Throughout the trading year, there will be periods of several weeks when lower float story stocks catch fire and give investors powerful moves in both directions. These stocks are capable of producing great sums of money for traders. We do not typically cover or open positions for our educational trading grid in such stocks due to their volatile nature. They are not suitable for most investors. However, we have had several requests from a number of our Gold members to cover such stocks, so we will provide our input and expertise to help traders make and protect potential gains in this sector. The stock shown above had tremendous news in the cryptocurrency, field partnering with MasterCard to allow crypto investors to leverage their crypto platforms and access their capital via a charge card. News in these lower float issues in current hot button sectors like green energy, crypto, social media, COVID, and partnerships with tech giants can draw in tremendous amounts of hot money.
DWAC rewarded investors who bought shares at the open on a Thursday at $13 or less as it surged to $175 the next morning prior to 10:00am.
We are going to cover some rules that have helped us make money in this sector. First, 95% of the time we have found it is far better not to make purchases in the premarket. Better entries are seen after 1-3 minutes from the opening bell. Secondly, in most trading opportunities we would look to exit no later than mid-day. PPSI, shown above, launched production of mobile EV charging units the day after the infrastructure bill was completed, which included money for green energy.
We will now look at the best way to identify these. First, a real-time scanner is needed that can identify the largest pre-market movers. There is a free app in the Apple and Google Play stores that is called “real-time stock screener.” It will allow one to scan real time premarket movers and regular market movers by largest percentage increases. Once you identify the top 5 movers, we would research each stock and check the reason for the move and catalyst. Then, once a solid headline is confirmed, we evaluate the float, total shares outstanding, and short interest. First, we must assume that on a large price spike some insiders or investors in the company who own shares that are not yet part of the public float may sell into this spike. So evaluating whether a company has a small float is important, but equally is evaluating the total shares outstanding. For example, Kodak 1.5 years ago had a huge move from $2 to $60 in two days. The float was several million but the shares outstanding was 60 million. Virtually all of the insiders (officers and institutional holders) sold on that spike. If in premarket trading you are seeing a stock that has done 20%-50% of its float already, that should be a huge positive for more upside into early morning trading. Secondly, shorts are relentless and it is far better not to have a stock that is infested with short interest. These large players will try to cap any rally in a stock that they are short and suppress price. A short interest under 5% of the total float is preferable. This does not mean you cannot make money from a price spike in a heavily shorted issue, but you should exercise more caution in the trade and be conservative.
Other factors we want to examine are the company’s cash and debt positions. Companies that have very little to no cash are likely to hire an investment banker to sell shares into a strong PR, capping any large move. PPSI was a great setup and a no brainer for a 9:31am entry. Great news in a great sector, small float and outstanding shares, a good cash position, no shorts, and very little debt.
In closing, momentum trading can pay off but traders must be alert, because when the music stops, the runs will become smaller and volume will dry up. Typical positive environments for these stocks are late October through December and March through early June. To avoid becoming a bag-holder, use stop-loss orders and remember that every trade is not a home run. Only when you see the perfect storm with incredible volume on solid news with a good technical picture, we would give the trade more time to work and shoot for more than just a small gain.