Three Reasons Bad Stocks Go Up (and Why We Play Both Sides)

When it comes to profits, I aim high. My readers do, too.

In fact, if you're reading this now, you may be one of the readers I'm thinking of. I have heard time and time again from Wall Street Insights & Indictments subscribers who have used my advice here to make serious profits. The ones who have stuck with me the longest are the same ones who have seen the biggest gains roll into their bank accounts, and nothing makes me happier.

For those of you who still have doubts, or are perhaps new to my services, I want to take the time to answer a question I've been getting a lot lately.

We tend to set our lofty sights on stocks that are heading south... but there are absolutely forces that can still push those stocks higher. If the market's going gangbusters and everybody's gung ho about stocks going to the moon, even crap stocks can (and often do) get pulled up, too.

In my mind, there are three distinct reasons that stocks that should be trampled on and trampled out of go up.

Here's the truth behind why loser stocks rally and how I give my readers what they need to profit no matter what...

Three Reasons a Loser Stock Pops

The first reason has to do with psychology, perceived value, and bargain hunting.

It's simple. In a bull run that investors think will continue, previously overlooked little piggies get noticed as new money is applied, and leveraged borrowing against winning positions generates additional investment capital.

This can send plenty of traders digging in the waste bin for those supposed bargain stocks and perceived "value" stocks. These aren't the same thing, though they are easily conflated by the uninitiated.

In a rotation, also known as money that goes looking for sectors or companies that haven't participated in the latest run-up, these deceptive stocks get bid up. That bid rarely lasts, and soon enough the stock will be right where it was before, if not lower.

The second reason these piggies can go up with a rising market depends on the games smart investors play with them. These investors, often professional traders with capital to play with, use the bull market to get into these stocks and just start taking offers, trying to push their prices (sometimes dramatically) higher.

The game is to, essentially, trigger panic buying by traders who are short targeted stocks. It sometimes doesn't take a lot of buying pressure to do the deed, while other times it takes a lot of money and requires a concentrated set of actions.

I used to play that game to my great amusement and almost always to my great profitability when I learned how to read fear and greed, first in traders' eyes on the floor and then "upstairs" when I was surrounded with metrics to help me read the crowd from a distance.

But to greener investors who aren't familiar with these maneuvers, it can make these companies seem like yet another faux bargain. The truth is that a manufactured pop in price doesn't change the fact that a company is circling the drain.

The third way that crappy stocks make a turnaround - and the only way that really matters to them - is because the company changes whatever it's doing that's not working. New initiatives, a new direction, or making tough decisions that can save a company can fix the issue that brought its stock so low and ready it for a genuine turnaround.

I'll be honest, this is pretty rare.

No matter which of these three reasons a stock we've targeted starts to come up for air, dealing with changing winds well is a mark of a seasoned trader.

Use the Pop to Profit

We've been dealing with these winds of change a fair amount lately. But, for us, two out of the three reasons I outlined above aren't worries in the least... And the third is only a bump in the road.

When it comes to companies pulling themselves together and making the necessary changes to become profitable again, it has a lot to do with the bull market. It's saving a lot of losers from the scrap yard. Good for them, and good for us. As some of them get taken higher as the bull thunders on, we'll be able to jump onto them at higher prices. And heaven help the dozens of companies we're targeting if the market stumbles. If it actually tanks, we'll make a lot more money a lot faster than we're already expecting to.

The second rallying cry, the traders trying to trigger short-covering rallies, is something we're prone to at any time and will be ready for.

We're already positioned in loser stocks and will be getting into more. Because they're losers, there are already large short positions in a lot of them. Those stocks are going to be targeted if the bull market continues. No big deal. We know it. It's temporary, and those short-covering rallies are just part of the landscape.

The only issue we're really going to have with stocks we're jumping on is if they manage to save themselves by selling themselves. Typically, it will be just to a private-equity buyer who wants to strip them in private. It can happen, but those will be few and far between.

I take all of this into consideration with every play I share with my readers. I position us to play both sides and collect profits no matter what weather comes our way.

Stick with me, kids. We'll be making a lot of money from these companies' inevitable extinction.

Urgent: 7,524 millionaires are legally manipulating penny stocks, driving up the prices. By getting in behind these trades, it’s like you’re making their shares your shares for huge gain potential in a matter of weeks. Read more

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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