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Systemic Versus Non-Systemic Risk
June 29th, 2006
In the world of penny stocks (and all types of investments, for that matter), there are two kinds of risk factor.
Systemic Risk is about penny stock downside due to the overall market environment. Meaning, when all penny stocks are dropping together, it is probably because of overall investor sentiment towards the entire market.
Non-Systemic Risk is about an individual penny stock that is dropping in price, independent of the overall market trend.
So, if you are holding 10 penny stocks, and they all go down (or up) together, that is probably a symptom of systemic risk. If 9 go up (or trade flat) and 1 goes down significantly, that is a much bigger problem. That is systemic risk, and it could signal that your lone loser is not is good shape.
The penny stock markets have been hurting a bit in recent weeks (and months), but you will notice that this weakness is across the board. And it's not even that people are selling shares, so much as nobody is buying or selling. The activity levels seem to be anemic.
Don't fret, however. I have been in this business for a really long time (yes, I know I look young!) and I've seen this type of market many times before. Call it taking a breather, call it consumer confidence distractions, call it whatever you like, but what's really going on is called consolidation.
Systemic weakness almost always bottoms out into a consolidation pattern. Lower penny stock price volatility, lower activity... but what else is happening at the same time? Shareholders are quietly turning over. A certain portion of the outstanding shares of each penny stock company is falling into new hands.
New buyers of penny stocks are less likely to sell (they just bought!) and are very likely to be holding for a longer term. Eventually, the percentage of investors that are 'unwilling to sell' increases, chocking off supply.
In penny stocks, little supply translates into major upside moves, the very moment that the demand returns.
So, when does the demand for penny stocks return?
The answer: eventually. This is 100% correct and true, penny stock demand will eventually return. Besides that, no one can know when penny stocks will see an uptick in buying interest.
What does eventually mean? It does NOT mean years. In means months. A few months. One month, five months, this is not yet known. But, it will be known soon.
My personal opinion (based on my research and expertise) is that we could see a great run-up in penny stocks (system wide) in September. Am I correct? I do not yet know.
Investors getting involved in penny stocks before such demand almost always make out pretty darn well. Like strawberries in June, this may be the best time to harvest this fall's penny stock picks.
If you want professional penny stock picks, visit the Peter Leeds website.