Blog : Follow the Smart Money

by Ed Zwirn on April 26th, 2013

Sometimes it's useful to look at what the smart money is doing. A case in point: In my April 1 penny stock week blog, I mentioned in passing that the Japanese were apparently among the beneficiaries of the capital flight from Europe that followed the Cyprus debacle.

It turns out that institutional investors shifted over $2.1 billion into the Japanese equity funds tracked by EPFR Global during the week which ended March 27, the largest such inflow at that point so far this year. Days later, the Bank of Japan changed the rules of the Japanese equity game when, on April 3, it committed to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.8 trillion) by the end of 2014.

Not surprisingly, the Japanese stock market has reacted quickly and positively to this stimulus, with the Nikkei average up about 12.3% since the announcement. Even the bullish U.S. stock market has feasted on some of the crumbs, with the Dow Jones Industrial Average up just over 1% since April 3 and everything from penny stocks to blue chips eking out incremental gains.

Did the institutional investors who bought into the Japanese stock market just ahead of this spike know something we didn't know and why should penny stock investors care?

"Even though the Bank of Japan hadn't acted yet, the writing was on the wall and the yen was going down," says Cameron Brandt, research director at EPFR Global. And this investment trend is continuing to accelerate, with nearly $5 billion going into Japan-Asia-Pacific equity funds in the two weeks which ended April 24. "A lot of Japanese investors are selling their euro-denominated assets knowing full well the Bank of Japan isn't going to backtrack on its program," he says.

The point for penny stock investors is that, however the fund managers may have come about the insight that Japan was a good place to move their money, their timing was impeccable and the reward great. Either somebody received a call from Tokyo, or the prognosticators hired by these institutional investors were smart enough to decide to cash in on a currency imbalance. Whether these exemplars of the so-called "smart money" got that way in this particular instance from inside information or a profound grasp of trends, they were in on the deal ahead of everybody else, and that's all that matters.

And timing like this can be the key to deciding on which stocks to buy or sell. As the bull market for U.S. stocks continues, it has been shown that the fate of penny stocks mirrors that of the broader market, albeit with a lag. Getting a good grip on market risk may be the key to winning big with your next hot penny stock.