The Feedback Loop

By: Tom Allinder
April 7, 2008

Yesterday, I wrote about negativity in the marketplace and how some individuals and companies are adapting.

Most people have heard about feedback loops associated with global warming... An example of a global warming feedback loop is: As arctic ice melts, the increasing area of seawater that was once ice absorbs more sunlight which hastens the melting of more ice.



There is a complex feedback loop going on in the marketplace of OTCBB and especially Pink Sheet Stocks.

It is no secret that liquidity has dried up over the last year on these markets. The credit crunch and sub-prime fiasco has contributed greatly to the lack of liquidity. The number of declining stocks continue to outpace advancing stocks. The overall value of the markets continues to decrease. Many companies traded on the OTCBB and Pink Sheets are now in SURVIVAL MODE. As their stocks decline in price, it takes more and more shares sold to provide the same amount of money to not operate and grow, but to SURVIVE. With a declining stock price, investors sell and the traders stay clear. The companies then seek help in the market to increase their liquidity but have no cash to pay for it. They pay in free trading stock for services. This is just one example of how the feedback loop is working. This usually leads to a more rapid decrease in stock price. However, a lot depends on what sort of services are being paid for. Quick fixes will usually end up with less than nominal results. A longer term strategy is a more positive step.

But yet, there are companies that are absolutely thriving is this environment. Why? Well, good companies pursue a strategy they have outlined with patience. They also inform their shareholders regularly and many of them are able to create a "team" atmosphere with their shareholders. COMMUNICATION is the key to success. In a bad market, GOOD COMPANIES CAN THRIVE; they can set themselves apart. Loyal Shareholders are a powerful asset!

Another example of a feedback loop is something that I am seeing more and more every day: Stocks declining on heavy volume in conjunction with good news. On April 2, I saw two stocks do this. Both had excellent news and traded more than TEN TIMES their normal volume and close LOWER for the day. How did this happen? It's simple: The company knows the news is good and is desperate to sell some shares to raise money. Their service providers need to sell to raise money. The initial advance in each stock on good volume was completely quelled by an avalanche of selling. So what are the chances now that the next time they have good news traders, much less investors, will jump into the stock? Maybe a new approach is needed?

In summary, I am seeing the good companies thrive while the others are struggling. But, there are many companies that can join those that are thriving with the right help in the marketplace. By constructing a strategy for growth, a company can begin down that path. Communication with the investment community is a key part of that growth.

Tom Allinder
GoBabyGoBook.com
HotStockChat.com

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