The Big Stock Market Selloff
Dear Penny Stock Millionaire,
What a rollercoaster we’ve been on. The stock market sell-off yesterday morning caused a trading halt right out of the gate.
I’ve been warning about this for weeks. My students were ready. Why? Because I teach my students to study stock market history. What we’re seeing is not unexpected. It’s not even unique. Check this out this tweet I sent yesterday.
“This $DIA chart was from a few days ago, but now with today’s big drop we’re matching up even closer with The Great Crash nearly 100 years ago…whatcha think? Remember, history and patterns repeat”
For all the haters out there who say my patterns and rules are too old school… ignore me at your own risk.
For those of you who aren’t sure what to do, remember that sometimes the best trade is no trade.
Trade of the Week
There are SO many coronavirus-related plays right now it’s tough to keep track. My email inbox and DMs are blowing up. I can’t keep up with questions from students…
So I’ll cover two at once here. Someone asked a question about this trade and it also happened to be one of my best-executed trades last week.
TOMI Environmental Solutions (OTCQB: TOMZ)
TOMI specializes in decontamination and infection prevention. The stock’s been in play since late January/early February after issuing a series of press releases. The company’s SteraMist products use something called Binary Ionization Technology. The product is a decontamination mist used in various places like China and South Korea.
Take a look at the TOMZ one-year chart:
As you can see, TOMZ was a multi-day winner at the end of February. It went up from roughly 30 cents a share to $1.50. That’s a nice five times your money. Arguably, that’s up too much.
And that opened the door for a fall. Actually, this is another very good lesson. Take a look at the TOMZ chart for March 2–3…
That failed late-day breakout on March 2 was a very good short entry. It broke the morning high, broke the midday high, and then … it failed.
A lot of newbies think this is an exact science. So they were buying the technical breakout. Look at all the buyers (see the rectangle around the volume candle). There were 200K shares traded in that one minute.
There’s a lesson there…
When a stock is overextended — up roughly 500% in a few days — that’s not the best place to buy a technical breakout. With all the short squeezes lately, I can see how someone might try. But if you do try that setup be sure to follow rule #1: cut losses quickly.
For me, I’d rather wait for my favorite pattern — the morning panic dip buy. Which is what I did.
This is where the student question comes in…
“Tim, why didn’t you buy the first dip on TOMZ? What made you wait?”
So for me, the first panic wasn’t enough. Right at the open, the stock failed pretty quickly. And you could have bought it at $1 and flipped it at $1.15. That’s a 15% upside within three or four minutes. Not bad.
Here’s the chart:
Looking at the chart, you can see I bought the dip on the second panic. I really like the second panic. When a stock is up so much, if you can wait for the second or sometimes third panic it can have a better chance of bouncing. When I bought, it was down 30%–35%.
Here’s my thinking … TOMZ has recently been one of the hottest stocks in the market. The main catalyst — the COVID-19 virus — is still going around. So the story isn’t over. The stock being overextended caused the first panic. Then all the initial dip buyers were giving up and that created the second panic.
So I like it when there are two sets of people panicking. That opens some opportunities. Sometimes it’s two panics, sometimes three. But when a multi-day runner is down 35% right near the market open, that’s usually a good time to enter.
What would I have done if it kept falling? Cut losses, of course. But there were buyers at 87–88 cents. It had support. I was watching Level 2 action for support rather than relying on previous support levels. That’s key.
Again, I wouldn’t just dip by a falling knife. I would’ve cut losses quickly if I was wrong. In this case, I was right.
Trading Questions From Students
I’m getting all kinds of questions while the market’s in turmoil. The first question is directly related to the stock market sell-off and recent volatility.
Do You Pay Attention to the Volatility Index?
The Chicago Board Options Exchange (CBOE) created the volatility index (VIX). It’s often called the fear index, and it’s a way to predict market volatility 30 days in advance.
Back to the question…
You already know that the markets are going crazy. I wouldn’t pay as much attention to VIX as I would to COVID-19 related headlines.
Why? Because this market volatility is all about the deaths and how fast the virus is spreading. And it’s about misinformation and conspiracy theories. There’s a conspiracy theory in the U.S. about whether we’re actually even testing. There are always conspiracy theories.
So you want to keep track of how fast it’s spreading. There’s an article that says there could be 500 people infected in Seattle — and they don’t even know it. If so, they’re infecting more people. It’s a scary situation.
Rather than the VIX, pay close attention to the headlines that can move the market. It’s not a normal market. It’s not a case of “Oh, we don’t know what’s going on…”
We know what’s going on. We’ve had an 11-year bull market, and this is an example of how bull markets can end. The coronavirus might not kill many people, but it can potentially kill economies.
Now with crude oil crashing as Saudi Arabia starts a price war with Russia, it all gets even more complex. Again, focus on the headlines that are moving the market. Why are we seeing the stock market sell-off?
What Market Conditions Would Get You to Short Again?
It’s not so much overall market conditions as … what creates a good short play? You gotta take it one trade at a time.
Here’s an example…
Back when I was shorting, I went in search of pumps.
What Happened to Penny Stock Pumps?
The pumpers just don’t do as good a job as they used to. The SEC really cracked down on them in the last few years. But pumping stocks happens in a different way now.
Check this out…
There’s this ridiculous bat bubble that people can wear to protect themselves. Now the designer is using social media to gather interest and get funding to build it.
Now, if that were a penny stock (it’s not)… and the stock went from $5 to $100… I’d probably short that. Because that pricing would be as ridiculous as the suit.
So look for absurd and ridiculous misinformation. That’s not the same as trying to guess a company’s valuation like all the Tesla shorts did. Guessing valuation is very dangerous. But if you look for extreme absurdist examples… even though they don’t happen as often, they can be better odds.
In Search of Informational Inefficiencies
Stay with me…
Since the coronavirus outbreak started, people are buying and wearing masks. But do they even work?
Unfortunately no. The masks aren’t really helpful. It’s just a psychological thing. You think you’re in control. They’re probably worse because people walk around thinking they’re safe wearing a mask. Actually, it’s better to just stay home.
So, what if you want to short these mask plays?
Look for misinformation. Again, when I was short selling, I looked for pumps. Now it’s more about what’s making the stock move. If it’s not being pumped, then what’s happening?
Logic Usually Prevails
With the mask plays, you gotta ask why there’s a stock market sell-off. Why are these mask companies going up so quickly and then coming down so quickly? Start asking questions. It’s not an exact science, but you’ll find that logic usually prevails.
Let’s take a look at a recent multi-day runner that went supernova.
Since we’re on the subject of short selling, informational inefficiencies, and coronavirus stocks… let’s stay with a mask company.
Alpha Pro Tech (NYSE: APT)
I wrote about APT in this recent post about the stock market crash.
There are some good lessons in how this stock has traded in the last few weeks. Check it out…
Penny Stocks Are Made for This
Penny stocks exist to enrich executives and insiders. These small companies do financings to raise money. Then the executives can make lots of money in salary over time… and they get options. OR… the executives can just sell straight up into run-ups.
Big companies — like Google or Amazon — are different. If C-suite execs at a big company sold all their shares, you’d see endless headlines. Maybe even lawsuits.
But with small companies, you kinda expect it. APT is no exception.
So APT had a huge run-up — all the way to the high $30s — and four top execs bailed. They sold tens of millions of dollars worth of stock. I don’t blame them. They knew their stock was crazy overvalued so they cashed-in.
Which leads to another lesson…
Penny Stock Run-Ups Are Unsustainable
I didn’t consider shorting APT because I didn’t know if it was going from $3 to $40 … or $3 to $100. During the Ebola outbreak, it only went from $3 to $12. This virus is spreading much faster — and the stock spiked three times more than during Ebola.
Now APT is back down because the news is starting to get out that masks don’t really help. So look for those informational inefficiencies.
Editor, Penny Stock Millionaires