One of the worst parts about investing in popular stocks such as large caps and small caps is that you are susceptible to market conditions. Over the past couple of days, the market has taken quite the beating and, consequently, many investors’ portfolios dropped significantly. Luckily, this drop did not affect my trading strategy. Of course, the title of this article is facetious, as I always pay attention to market conditions, however, it is intended to prove a bigger point. Certain markets function independently and are not prone to the influence of the larger markets. This is not to say that all penny stocks are uninfluenced by the larger markets, but there are a select few stocks that defy the macro sentiment of the large markets. Why is this? The answer is simple. Some stocks have a cult-like following that pays no attention to larger indices such as the Dow Jones Industrial Average, NASDAQ composite, and S&P 500. Essentially, these are micro-markets that follow their own set of rules. Stocks that fall under this category are traded way differently than main stream stocks. These stocks are not traded by wall street investors who pay attention to the overall condition of the market. They are traded by day traders, gamblers, dreamers, and others who are trying to make fast money (See my post about why “real” investors avoid penny stocks for more info).
So, what was I up to while the rest of the market was panicking about the massive drop? I was trading a company called Triton Distribution Systems (TTDZ). The company has positioned themselves in the medical marijuana industry and has mustered up a lot of hype. I was able to make a nice profit on the stock through intraday trades.
These are the reasons I traded TTDZ on Monday.
- TTDZ is the number one stock on Investors Hub – For those who don’t know, Investors Hub is one of the most popular message boards for discussing OTC stocks. Being a top stock on the site does not guarantee upward momentum, but it provides a crucial element for success: exposure. The TTDZ message board is read by tens of thousands of people. This leads to the stock gaining the exposure it needs to run, and the daily volume of nearly 120 million shares on Monday confirms this. There are many amazing companies that never reach their fair value due to a lack of exposure. Exposure can lead to high volume, and with positive catalysts in play, this can lead to a breakout.
- Positive sentiment – I talk about market sentiment in another post and explain why it is so important. TTDZ had great positive sentiment from a cult-like following that believes the company is going to become a leader in the medical marijuana industry. A stock can run on positive sentiment alone, as proven by TTDZ. TTDZ had no direct catalyst that triggered its movement, but positive sentiment pushed the stock price to new highs. When you have tens of thousands of people reading a message board with mostly positive posts, this can influence new investors to buy shares and drive the price of the stock upwards.
- The charts don’t lie – TTDZ was a great technical play based on the charts. The stock has been in an upward trend for weeks now. Volume sustains itself or increases alongside the share price, which is good, because dollar volume is increasing every day. Last but not least, the stock kept breaking through resistance levels without a problem. There were no “blue sky breakouts” after each break, but instead each new high was followed by a short run and consolidation. The stock continues to test new highs as I write this post.
- Volatility and Liquidity – There were plenty of opportunities to buy and sell TTDZ. The stock would pull back to its lows intraday and set new highs intraday as well. My strategy consisted of buying shares at support levels and selling at resistance levels. The liquidity of this stock made this possible. With roughly 120 million shares traded, it was pretty easy to get buy and sell orders filled.
- Positive catalysts expected – TTDZ shareholders are expecting a variety of positive catalysts in the near future, including financials, a ticker symbol change, and potential dividends. This anticipation builds a strong positive hype as investors believe the price will skyrocket in the future. Had a press release been disseminated the stock could have run even further, as it may do in the future.
Overall, TTDZ was an easy, predictable pick for making some fast profits. My percentage gain was not exceptional, but any gains are good gains. I limited my position size to avoid unnecessary risk. Notice how my rationale states nothing related to the company’s fundamentals. They did not matter in this case. So, what is the point here and why am I adding this example?
TTDZ traders did not care about the market conditions. No one was posting on message boards stating, “the stock is doing well, but the down market may takes its toll.” These traders do not care about the larger markets. As long as they are making money, they are happy. These aren’t wall street investors and they have a completely different mentality. It may seem naive to base trading decisions off of the posts on a message board, but when you think about the psychology of trading, it can make more sense. People are influenced by what they read, and their trades often reflect this. Of course, I had other reasons for entering the stock, as mentioned above.
A lot of other stocks on my watch list took a hit, but I avoided trading those stocks. The goal is to find stocks that fluctuate independently from the main markets on days when the market is down. By finding these stocks, you can protect yourself from drops in the market.