Bulletin Board Trading Surge May Signal Rally Top
March 19 (Bloomberg) -- The OTC Bulletin Board, home to hundreds of companies whose stock trades for pennies, has become a lot busier this year. Analysts such as John Bollinger said the surge in trading suggests U.S. stocks may be headed for a fall.
The dollar amount of shares traded on the Bulletin Board rose almost four-fold last month to $5.5 billion.
Based on January's and February's pace, the market may have its second-most active year on record. The busiest was 2000, when benchmark U.S. indexes set record highs and then started a three- year plunge.
``It shows that even in the bear market that we had, the speculative spirits weren't crushed,'' said Bollinger, founder and president of Bollinger Capital Management Inc. in Manhattan Beach, California, and developer of ``Bollinger bands,'' a system for analyzing securities' price moves.
As a result, he said, the 12-month rally that's boosted the Standard & Poor's 500 Index by 40 percent from its low in March 2003 isn't sustainable.
The total value of shares traded on the Bulletin Board is on pace to reach $77 billion in 2004. This total would be the second highest on record, surpassed only by the $100.8 billion changing hands in 2000.
Trading System
The introduction of electronic trading in Bulletin Board stocks may be contributing to the market's resurgence, said Nicholas Ponzio, chief executive of Hill Thompson, Magid & Co., a brokerage in Jersey City, New Jersey, that makes markets in shares of smaller companies.
Archipelago Holdings LLC, which operates an electronic stock- trading network, opened a trade-matching system for the 3,600 securities in July. In 2000, trading was done primarily by phone, Ponzio said.
The Nasdaq Stock Market, operator of the Bulletin Board, abandoned a proposal to start its own electronic market in June. That plan called for new listing standards. Companies just have to keep current with quarterly and annual reports to regulators in order to qualify now.
`Fundamentals Matter'
Relatively large gains for the smallest U.S. companies in the past year may also be responsible. A Wilshire Associates Inc. index of ``micro-cap'' stocks has jumped 106 percent in the past year, more than triple the gain of the S&P 500.
The micro-cap indicator tracks companies that are below the top 2,500 by market value within the Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks.
``Typically, you do get the recovery in those speculative stocks in the first year,'' said Steven DeSanctis, small-stock strategist for Prudential Equity Group Inc. ``In year two, fundamentals matter.''
To analysts such as Bollinger and Alan Newman, editor of Longboat Global Advisors' CrossCurrents newsletter, year two may also mean the end of the market's overall rally. The speculative fervor shown in Bulletin Board trading indicates that shares are overvalued, they said.
`Last Stage'
``When people are more interested in buying the absolute garbage rather than the blue chips or anything of value, that's generally the last stage,'' Newman said.
Stocks may begin falling at the end of third quarter this year, Bollinger said, and 10 years from now, benchmark indexes will be little changed. Increased speculation on ``lower-quality stocks'' is characteristic of the top of a rally, he said.
Newman said the Dow Jones Industrial Average may drop as much as 38 percent over the next two years because speculation has pushed stock prices too high.
Even Leeds, who makes his living off penny stocks, said he has a cautious outlook. ``Most people are going to lose out'' by investing in these shares, he said. ``Ninety-five percent of them I wouldn't go near.'' |
