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MGT Capital Investments (NYSE: $MGT) Penny Stock Squeeze

I saw the news on May 9th on USA Today and on Fortune “John McAfee is back in business“.  Hindsight is always 20/20, and in hindsight, I should have backed up the truck and loaded with as many shares of $MGT as I could afford!  Hindsight always makes things so clear!  In all seriousness, I knew that anytime you see a penny stock company making the front pages it’s going to be a big mover.  It just attracted so much retail interest with the PR of McAfee coming back.  McAfee, a pioneer of virus scanning software, founded McAfee Associated in 1987.  The company was later sold to Intel, and is now branded as Intel Security.  McAfee amassed a fortune in excess of 100mil at his peak, but suffered losses in the late 2000’s during the global recession.  As of 2009, McAfee’s net worth had dropped to 4mil according to a NY Times Article.  On May 9th the news was posted the McAfee would lead MGT Capital Investments (NYSE: $MGT) as the new CEO and that the company would change it’s name to John McAfee Global Technologies Inc.  This sparked a surge of buying that propelled the stock from 42 cents on May 9th to nearly $6.00 per share on May 18th.

Recent Penny Stock Squeezes

For seasoned traders, $MGT is just the latest penny stock to surge on a strong catalyst.  In recent memory we’ve seen 500-1000% runs from $DGLY (maker of Police Body Cameras) $LAKE (maker of Ebola BioHazard Suits) $KBIO, and $VLTC.  The surge in MGT Capital represents the markets natural tendency towards irrationally strong, or irrationally weak price action.  We often see strong catalysts result in almost unthinkably extreme moves.  The market is self correcting, and today shares of $MGT pulled back from a high of $5.58 to a low of $2.27 for a 60% drop.  Despite today’s drop today, the stock is still up over 600% in the last week.  I expect today’s strong sell off will mark the peak of the breakout and will allow shares to normalize at a price somewhere between the $1 and $3.00 price range.  While it’s true that some stocks squeeze out of the penny stock range only to fall back into the pennies, most stocks with a strong catalyst, like MGT Capital, find a price somewhere between the initial breakout and the high of the parabolic move.

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The Price Action of Greed and Fear

In contract to the price action of some recent parabolic movers, $MGT traded in an extremely crowded way.  In fact on May 17th, it traded over 100 million shares, vs Bank of America trading just 76mil shares.  For a stock that was trading 30 cents just days ago to be trading on heavier volume than Bank of America is truly impressive.  Volume on $DGLY peaked at about 20mil shares, $LAKE at 47mil shares, $KBIO at just 17mil shares, and $VLTC at just under 30mil shares.  This means $MGT traded on 2x heavier volume than 5 of the last big parabolic runners.  As a result of this heavy volume, $MGT traded with an extremely thick Level 2.  This means the Bid and Ask were both stacked with big orders, often in excess of 50k shares.  This massive orders ended up playing out like a tug of war between the buyers and sellers.  We frequently saw whips in the price action, surging up 10-20 cents, then dropping 20-30 cents.  In fact, the largest 5min candles during the course of the surge were red candles.  This is indicative of the way fear and greed impact price action.  Greed draws buyers in at higher and higher prices, and then the fear of a pullback sends everyone running to the doors at the same moment.  This made the stock very difficult to trade in comparison to some of the other big movers in recent history.