I started out with $1400, at christmas I had $3900. THANKS! This was done in a 3½ month interval.

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Penny Stock Investors and the Running of the Bulls and Bears

July 11th, 2008

Feel like running with the bulls? A pack of unimpressed bulls gored a Spaniard, knocked an American unconscious and injured five other people Thursday in a dash through the streets of Pamplona to the city bullring. In Wednesday's run an American from California was gored in the buttocks and had to undergo surgery.

Running with the bears can be equally as challenging. The carnage on Wall Street was a little less dramatic, but impressive none-the-less. As of Tuesday, all three major indexes were in bear market territory, having closed down at least 20% off the October highs.

It’s an over worked cliché, but the carnage does mean a big recovery for all three of the indexes could be in the works. And penny stock and small cap stocks should help lead the way.

In fact, some analysts are finding some signs in the performance of small and penny stock companies that might be pointing to the early stages of a much broader recovery. Small cap stocks are now doing better than the overall market – and that has some analysts hopeful. But really, who isn’t hopeful at any signs of life?

Penny stock and small cap stocks typically dip lower during tough economic times as investors look to safer investments, but they're also (usually) the first to rise when the economy rebounds. Or so the wisdom goes.

Historically, in the year following the end of each of the past 10 recessions, small cap stocks rose an average of 28% compared to 19% for large stocks. Penny stock companies, which have an ounce or two of speculation built into their share price, have been known to rebound higher.

“The classic thinking is that if you’re going to bet on a recovery, small-caps are going to lead the charge,” said one Houston based co-portfolio manager. “And when all you hear about is oil prices, interest rates and credit exposure in the small cap world you can find unique companies that can grow despite a bad economy.”

Pouring over miles of economic data, it generally takes a few quarters before economists officially declare a recession. By the time a recession has been declared, it’s not uncommon for the U.S. to already climbing its way out.

Right now, the general consensus on Wall Street is that the U.S. is already in a recession. That means that the rise in small-cap stocks might indicate a recovery is already underway.

But then, even a lumbering bear can fake you out as cleverly as a raging bull. Bear markets are full of false starts and signs. Just when it looks like its getting better, stocks can fall. When the skies above Wall Street are darkest, stocks can rebound.

One equity research analyst said she thinks the rise of small cap stocks might be more of an anomaly and not a sign of recovery. But, she said, many investors who aren’t buying small caps, and who gravitate to large cap stocks should diversify into smaller companies.

“Investors should be less market cap sensitive and more value sensitive,” she added.

Large cap investors often point to the inherent volatility found with small cap and penny stocks. As penny stock investors, we point out that they also have the best potential for fast growth.

Most penny stock companies can be found in niche markets, this advantage helps them withstand even a bad economy. Smaller companies tend to have leaner staffs and more cost controls. Further, their products or services are often specialized enough so they can defray certain costs onto customers.

The operative phrase for penny stock investors looking to increase their holdings during a bear market is "selective buying." Look for those penny stock companies with strong operations, great fundamentals, captive niche markets, and you’ll probably stumble onto a company with tremendous upside potential.

If you’re looking for growth, then become a penny stock investor. Because with penny stocks, there’s always a bull market happening somewhere.