Five Stocks Swim Under a Choppy Sea
By Dan Fitzpatrick
RealMoney.com Contributor
3/10/2006 5:46 PM EST
Click here for more stories by Dan Fitzpatrick
This column was originally published on RealMoney on March 10 at 1:00 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
What do we do in a volatile, choppy market full of fake-outs and unsustainable moves? There are just so many crosscurrents and hidden forces out there that it's easy to get hurt.
But what if we can find a more predictable market within the market, a market that isn't subject to the same dynamics as the large-cap, high-priced stocks that get so much coverage by CNBC, The Wall Street Journal and others?
Low-priced stocks, those that trade for less than $5, are worth a look. Most stocks under $5 are ignored by the majority of investment firms; there just isn't much demand for these shares. (Could it be any other way? If demand was widespread, the stocks would be trading at higher prices.)
Think of these low-priced stocks as the subsurface ocean water during a big storm. The surface is turbulent and choppy. But underneath this mess, the sea is calm and more predictable.
The forces of supply and demand still control the price action, but these low-profile stocks have less of a tendency to trade in sync with the market. They also can produce sizeable gains.
After all, a $2 stock that advances 50 cents produces a 25% gain. But a 50-cent decline -- entirely possible with the members of this more volatile group -- puts a 25% dent in your account.
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Generex Biotechnology (GNBT:Nasdaq - news - research - Cramer's Take) is forming a bullish pennant pattern. This series of lower highs and higher lows can't last much longer. The stock will break out of the trading range as soon as the profit-taking is complete. At that point we'll know whether ample demand exists to push the stock higher. If the bears push the price below $2, that high-volume test of $2.50 at the end of February could turn out to be the end of the advance. So I'd keep a tight stop just beneath $2. After all, a drop to $1.50 is more than a 50-cent decline -- it's 25%!
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