Speculative Stocks and why they are Dangerous

…A few weeks ago I spoke why I didn’t include Sirius Satellite stock on the daily or weekly screens. To refresh, I noted two important points:
1. The company has yet to turn a profit
2. I have established positions in companies that show a profit and potential.

This is not to say that Sirius can’t continue its climb as the stock is an excellent spec (speculation) play. There is plenty of money exchanging hands in Sirius but it’s not backed by earnings or cash flow.

Today is a perfect example why members of this community should stay away from speculative stocks. As bad news hit the wire (downgrades from two firms), the stock tanked with an opening gap-down (visit the Philosophy and Education section for further information on gap-downs) and continued with weakness throughout the day. Strong stocks with strong earnings can also fall fast when bad news hits the wire but they usually make up this ground in the following days and weeks. Sirius may make a strong comeback but the odds are currently against the stock that fell over 20% on the largest volume ever (over 500 million shares).

We also feature a chart showing a gap-down in our Technical Analysis section of the community.

Most of the recent action surrounding Sirius comes from the Howard Stern announcement last month. Keep in mind that Howard is not scheduled to take to the microphone until 2006, more than a year from now. Until he starts his show and subscriber numbers are increasing, this stock is pure speculation.

A domino effect always occurs in speculative stocks when bad news hits the wires; this is because “dumb money” becomes scared and they start to sell creating a windfall of activity. It is one of the most dangerous situations to be wrapped into when everyone is trying to sell and the number of outstanding shares far exceeds the number of investors willing to buy.

Overall, Sirius is still in decent shape according to the charts. It has not reversed any major trends and has not broken any major support lines. Until the stock breaks support, it has the potential to regain the momentum of the past few weeks.

Piranha