Trade 'Hot Money' Stocks Carefully; They Can Burn

RELATED QUOTES

SymbolPriceChange
AAPL95.18+1.54
INVN7.61-0.21
MSFT49.78-0.83

It's a good sign for a stock to have strong backing from hedge funds and other institutional investors. But when can institutional buying become a curse

Sometimes a hyperactive fund or two will look to make a fast buck in small-cap stocks that boast strong fundamentals and an appealing backstory.

This helps to explain why such "hot money" stocks will sometimes rise like a Phoenix only to crash and burn just months or even weeks after the breakout.

Such stocks, in other words, may only produce one good base. After a nice breakout and rally, the run is over.

To guard against such a fate, keep emotions in check and watch fast-moving small-caps (in general, those with a market cap of less than $1 billion) very closely. Follow sell rules. Also, avoid chasing the stock or pyramiding liberally.

Consider the wild adventures of InvenSense (INVN). The maker of motion-processing chips went public in November 2011 at 7.50. Its market capitalization at its IPO was less than $1 billion. Sales growth was strong; yet sales on a quarterly basis were limited to the tens of millions of dollars.

InvenSense quickly formed its first base, a cup-without handle with an 11.95 buy point 1 (weekly chart is shown).

InvenSense had an alluring tale to tell. The Sunnyvale, Calif.-based chip designer was rumored to supply motion sensors to Apple (AAPL) for its hot-selling iPhones and for Microsoft's (MSFT) X-box game console.

Profit growth was rapid, rising 250%, 117% and 133% in the three quarters through March 2012. Sales growth was similarly strong, rising 83%, 52% and 39% over that period. InvenSense made its way onto the IBD 50 and in Leaderboard.

On Jan. 9, 2012, InvenSense broke out above the 11.95 buy point. 2 Volume was 714,000 shares, third most since the base started forming. Turnover picked up to just over 1 million shares the following day.

The stock raced up 61% over the next five weeks, hitting a high of 19.34 on Valentine's Day. 3 That's a red-hot move. Along the way, however, volatility picked up in contrast to the stock's orderly, tight base.

InvenSense pulled back sharply in strong volume to the 10-week line before lurching back up to a peak of 22.35 on March 26. 4 The four-week base it formed was too narrow and thus flawed.

From there, the stock plunged as fast as it soared, dropping 15% in one week and 12% the next. In just seven weeks since peaking, InvenSense made a round trip, falling below its original entry. 5 A good time to have sold would have been on April 4, when the stock crashed through its 10-week line in huge volume. Today, InvenSense remains sharply below its proper entry point.

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3589+0.0063+0.47%
    USDSGD=X
    1.5603+0.005+0.32%
    EURSGD=X
    1.9672+0.0013+0.07%
    GBPSGD=X
    78.6147-0.5506-0.70%
    SGDJPY=X
    5.7111-0.0282-0.49%
    SGDHKD=X
    2.9567+0.0089+0.30%
    SGDMYR=X
    9,779.4658-29.7842-0.30%
    SGDIDR=X
    4.7858-0.014-0.29%
    SGDCNY=X
    1.0143+0.002+0.20%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,279.00-12.80-0.99%
    GCM16.CMX
    17.24-0.26-1.48%
    SIN16.CMX
    87.23-3.50-3.86%
    ^XAU
    2.20-0.02-0.88%
    HGN16.CMX
    43.67+0.02+0.05%
    CLM16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.26-0.06
    ^FVX
    1.80-0.07
    ^TNX
    2.66-0.06
    ^TYX

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.425-0.005-1.16%
    N21.SI
    0.785-0.020-2.48%
    G13.SI
    3.76-0.07-1.83%
    Z74.SI
    0.385-0.005-1.28%
    E5H.SI
    0.730.000.00%
    Y92.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.48+0.08+20.00%
    BFK.SI
    0.194+0.019+10.86%
    D79.SI
    0.28+0.03+9.80%
    BHO.SI
    0.185+0.015+8.82%
    AYL.SI
    0.50+0.04+8.70%
    BQP.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.088-0.082-48.24%
    P74.SI
    0.30-0.09-23.08%
    Y06.SI
    0.125-0.027-17.76%
    5MQ.SI
    0.21-0.05-17.65%
    Y35.SI
    0.31-0.04-11.43%
    AWK.SI