Blog : Stock Pickers Staying Glued to the Screen

by Ed Zwirn on April 10th, 2013

By Ed Zwirn

Does your penny stock tend to go up and down in tandem with the broader stock market? If so, now might be a good time to stay glued to the monitor.

The Dow Jones Industrial Average stands at a record 14,795.42, up 0.83% on the day. The broader NASDAQ Composite, about a quarter of which consists of penny stocks, is up more than 1.5% so far as of 11 a.m..

One factor giving penny stocks a boost Wednesday morning is the apparently inadvertent early release of the minutes from the Federal Reserve's March 19-20 meeting, at which it was decided to continue the central bank's aggressive monetary stimulus efforts.

To be sure, these minutes reflect some doubt on the part of the Fed's governors. "Participants pointed to possible risks to the stability of the financial system, the functioning of particular financial markets [and] the smooth withdrawal of monetary accommodation when it eventually becomes appropriate," the document states.

But, doubts like these notwithstanding, the overriding relevance of the release for penny stocks is that the Fed will continue to aggressively print money for the foreseeable future, a message underscored by the near unanimity of the 11-1 vote on the bank's policy statement.

A more recent pointer in this direction came last week, when the Bank of Japan announced an aggressive monetary stimulus program designed to boost inflation to 2%, sending the Nikkei average soaring and the yen sinking. This BOJ move has in fact upped the central bank ante, and will force the Fed to remain accommodative and may even push the European Central Bank to pump up the volume.

And the political groundwork is being laid for this stimulus. U.S. Treasury Secretary Jacob Lew spent the early part of the week lecturing Europeans on the need to forget about bringing down deficits. Financier George Soros said in a speech in Frankfurt on Tuesday that Germany is "imposing the wrong policies on the euro zone," adding "austerity doesn't work."

In the wake of the BOJ action, especially if Europe responds to it, we are likely to see a market in which everything from hot penny stocks to more sedate blue chip investments gets boosted by an inflow of cash. This new market will also be much more volatile, as this money moves around the world as investors seek protection from the devaluation of their currencies.

The Fed can hardly afford to put the brakes on any of this, even if its governors are so inclined. In the meantime, penny stock investors need to keep a sharp eye on the price of their shares relative to fundamentals, fashioning their entrance and exit strategies with care. With a sober investment strategy suited to your own cash flow needs, you have a chance to capture the lion's share of your penny stock gain while avoiding a hit where it hurts.