In 1996, I started my trading career on 110 Wall Street, NYC as a proprietary equity trader. I was exposed to trading investment grade stocks listed on the NYSE or NASDAQ exchanges with prices greater than $5 and having market capitalizations of over $100 million. My mentors at the firm traded only these and thus so did I. For the next 18 years, small and mid cap stocks were my bread and butter. Mega cap stocks like Exxon and IBM were too liquid for me to tape read so I tended to stay away from them.
Then in 2014, I stumbled upon Twitter as a secondary source for financial news. Here I was exposed to the world of nano and micro cap stocks, stocks with market capitalizations of $50 million or less and usually with stock share prices of less than $5, companies which I refer to now as "microturds" or "nanoturds". Twitter was filled with people boasting how they made five figures daytrading companies that financially looked like they would file bankruptcy any minute after the close. If these traders on Twitter could rake in the dough on these type of stocks, why couldn’t I? I decided to dive into trading these shitty companies. Stepping out of your comfort zone makes a great trader even greater. Learning new trading techniques and strategies only makes your potential earnings power grow.
The captivating aspect of trading nano caps is the price volatility. These days it seems like there is at least one nanoturd that slowly rises over 100%+ in price each day. Compared to normal stocks listed on the NYSE that kind of move is unheard of. Here’s a list of what I found common to nano cap stocks, a lot of it ain’t rocket science but interesting stuff:
1) The worse the fundamentals, the higher the nanoturd flies when it is pumped. Companies who have going concern warnings on their latest 10-Q filings tend to have more violent price swings to the upside. I began to wonder why and came up with some reasons. First, companies with fundamentals equivalent to the stuff that comes out of my behind are heavily shorted and experience a massive short squeeze when the stock runs upwards paired with new investors/traders/pumpers blindly scrambling to go long on the next hot play. Second, these companies need to raise capital via massive dilutive equity offerings to stay in compliant with Nasdaq listing requirements or just to stay liquid, and "magically" rip up a day before they announce an offering. Note, I wrote magically in quotes. Blatant stock manipulation must be going on when these nanoturds fly to the moon on 10000x normal volume most likely by paid stock newsletter promoters or pumpers in live stock chatrooms or affliates of the shady chop shop investment bankers involved in the secondary offerings. I am really surprised the SEC hasn't cracked down on this because the stock manipulation is so apparent. Another thing about the fundamentals of these companies is that since their businesses are not complex it's very easy to understand the financials of the company when digging through their lastest 10-Q filing. If anyone is interested in reading SEC filings, these companies would be where you would want to start. They are straight forward and easy reading with not too much complex financial reporting in them, as compared to a mega cap company like Google with many subsidiaries and too many numbers to keep track of.
2) A majority of big upward moves on nano cap stocks start on the day when a press release is issued about ANYTHING related to the company. Sometimes after reading these press releases I scratch my head and ask why would this stock go up +300% in one day because of this news? Some of the pr's are legitimately positive material news for the companies however most of them are just gibberish and put out to trick the dumb. For example, a $5 million dollar market cap stock announces that it has signed a joint venture with another about to go bankrupt company and plans to develop new products together. No financial terms of the deal are revealed. Stock opens at 9:30am at $1 and closes at $3.50, with 10x the float exchanging hands that day. WTF right? (For the newbie, we'll do a volume comparison of a well-known bigcap stock Apple Inc. ($AAPL). AAPL trades an average of 29M shares each day, with a float of 5.2B shares. Each day only around 0.55% of the float exchanges hands. If AAPL traded 10x its float in one day, that would be 52B shares! I'm sorry but that will never happen.) Let's also take a look at weed stock $ETST, a stock I am currently short. In the past month they have put out 6 press release pumps with half of them being total meaningless. Beware of stocks that are highly promoted by the company itself with financials as good as the white stuff on your car windshield and by penny stock promoters who get paid by the company itself to sucker the unsophisticated Joe Blow to get long. They usually signal financial distress and a majority of them have share the same story ending --- the stock does a highly dilutive secondary with warrant offering = longs get reamed.
3) In general, the daytraders and investors who are actively GETTING LONG these nanoturds are a lot younger in age than those that trade listed NYSE and NASDAQ stocks. What does this have to do with anything? It says A LOT to me. It means the average trader who buys these stocks are less educated, less financially savvy, less wealthy, and less experienced with the markets and how they work. Most of these traders have trading accounts less than $10,000 and are attracted to the inexpensive share price of these stocks. They would rather buy 5000 shares of a $1 stock than only 100 shares of a $50 stock. I wouldn’t be surprised if most of them can’t even understand what’s inside a company’s SEC quarterly filing and or even know how to access these corporate filings. A lot of “sheep” are getting long these stocks when they fly. Sheep = clueless people who have brokerage accounts that follow the blind advice of another that they think can make them money. Bottom line, there are a lot of clueless people involved getting long this garbage. Check out the quality of posts you see on StockTwits in these names and you will understand what I'm talking about. Another concept I can’t comprehend is that these people think reverse splits are positive for a failing nano cap company. Having a new crisp $1 bill is worth significantly more than 100 oxidized pennies. That’s “sheep” thinking and absolutely retarded. Low float must mean the stock will go up right? Ask the guys who top ticked $DRYS above $110 (I'll explain more about that later in the post).
4) Less capital is required when trading nano cap stocks as compared to NYSE listed stocks in regards to bearing the same amount of risk. During the first week I started shorting these pump jobs, I made the mistake of using the same buying power I would normally use when trading NYSE listed stocks. Let’s say for example my initial opening size for a NYSE stock trade is $50,000. I would also initiate $50,000 positions in these nanoturds. From my experience I can conclude that having a $10,000 position in one of these OTC or pink sheet nanoturds is risk equivalent to having a $50,000 to $100,000 stock position of a listed NYSE stock. On a side note to novice investors, microturd stocks usually have a 100% margin requirement at your broker as compared to 25% for normal stocks. You will need to take this into account if your bank roll is limited. You get more bang for your buck when trading these nano cap stocks so I can understand why investors with very limited funds would want to flock to them.
5) Technical analysis plays a larger role in daytrading nano cap stocks than fundamental analysis. I’m not a fan of technical analysis and never will be but when most of the clueless traders getting long these things are following technical indicators like VWAP and 9ema, you have to take note too. Understand what the sheep flock to and take advantage of it. Fundamental analysis and tape reading play a large role in my decisions when daytrading NYSE listed stocks as well as when I get short these nano caps. But sometimes these nano cap stocks on days where they trade ten times the float are so active and liquid that it makes tape reading hard to decipher. I am then forced to rely on technical indicators.
6) The massive triple / quadruple digit gains on microturd pumps always fizzle over time so it pays to be short them. The only problem is that you do not know when the pump will end. Take for example the most ridiculous microcap pump job of the past few years: Dryships ($DRYS stock ticker). It went up +1500% in three days on no real concrete news but pure speculation, pump job, and sheep buying. The Nasdaq halted trading on November 16th in the stock before the 9:30am opening bell four days after the pump started for "additional information requested". Past examples of this type of additional information requested halt result in the same outcome: the Nasdaq just created a ton of long bagholders, in plain English ... the stock is going to tank hard when it re-opens for trading). Three days after DRYS hit its $115 high it was back down to $5 a share, and currently is trading at 30c a share (prices are before the January 23, 2017 recent 1:8 reverse split). What’s funny to me is reading on Twitter that people were buying $DRYS above $100 and saying it’s going to $200 and still undervalued, or when it starts collapsing in price they tweet "I don't understand why it's falling". Sheep at its best! Don’t cover and stay short if your capital can bear the squeezing. In fact, short more on the way up!
7) No way in hell will I ever get long a cash-strapped microturd. If the financials tell me that the company is desperate to raise cash and/or imminent to file chapter 11, I will not go long … ever. The same goes with fluff or meaningless press release pumps. You never know when these highly manipulated stocks will get halted by the SEC or stock exchanges and if they do you are left holding the bag like a retard who deserves it. $DRYS anyone? $KBIO? You will not get any sympathy from me. Nowadays the new hot sector the sheep are pumping are cannabis stocks. Long and wrong for sure. The traders who love to buy up these stocks are probably thinking that I’m the dumbass for not getting long them. There are so many different ways to make money trading stocks and more power to them for doing something I can’t. I can now understand why none of my mentors on Wall Street never traded pinks or nano cap stocks. It's because they are highly manipulated and most of them are financial garbage -- things a series 7, 55, and 63 licensed equity trader would never buy for their mothers or their clients. They understand the concept of working capital, why a company goes bankrupt, and how important a going concern warning means in an SEC filing. I wish just one of them shorted them so that I could have learned that strategy much earlier in my career.
Hearing the NYSE closing bell on CNBC, I can now relax and call it a day. Looking at my realized P&L on my computer screen it gives me great pleasure to see that I’ve made a few extra thousand dollars shorting nano cap stocks, adding to my already numerous gains from small and mid-cap NYSE and NASDAQ day trades. Broadening the range of the type of stocks I can trade equates to more profits for me at the end of the day for myself and my live stock chat members. Don't be afraid to expose yourself to new trading strategies. Slowly master them one by one. I consider myself a very proficient all-around trader these days --- daytrading pinks to household recognized companies listed on the NYSE both long and short as well as swing trading them (holding them overnight for an extended period). What's next for me? Arbitrage trading? That's something I haven't done before.....
- Hubert Tsai, aka @MookTrader