Why I'm Concerned for the #Wolfpack

Before I receive dozens of angry emails, let me start by saying that this post is not meant to bash the latest twitter sensation, "WolfOfWeedSt." In fact, I've been quite impressed by some of his picks so far and how much they've run from where he initially called them. What concerns me is the cult-like mentality that has taken hold of this "Wolf-pack," because I've seen it far too many times and know it's just a matter of time until the bubble bursts.

The Wolf recently received quite a bit of publicity, as he was featured in this BBC article about Weed stocks. In this article the Wolf says, "I've started to treat the whole sector like a giant game of Frogger, I ride the wave and then jump." So why are so many of his followers obsessing about company fundamentals as if these are long-term investments? I also am curious as to why so many #wolfpack members seem quick to ignore where this wave of momentum comes from in the first place.

I have to give credit where credit is due - FRTD offered a fantastic spike yesterday upon announcement:

Let the chart tell the story. I think it's obvious what time the tweet about FRTD went out. In the first ten minutes after FRTD was mentioned, it traded roughly 30 million shares and skyrocketed from $0.041 to $0.075, an 83% move. FRTD didn't spike because it suddenly had better fundamentals or a better long-term outlook - it spiked because someone with a large following tweeted about it. Am I complaining? Absolutely not! Spikes like this are what I used to love to play with promoters like "Awesome Penny Stocks." Most of the time, when you see quick spikes in the OTC market, it is on light volume and very hard to take advantage of. The FRTD move happened on SIGNIFICANT volume, and I know that I plan to buy any future "WolfOfWeedSt" announcements for quick flips until he loses his flow. That is the predictable part of the trade.

So why am I concerned for the #wolfpack? Because there seems to be a mass delusion out there that these Wolf picks are going to be the next big thing. I suppose I can't say with certainty that they won't be. Unfortunately, the reality of the situation is that if you're investing longer term in OTC stocks, you're playing a game in which the odds are massively stacked against you. Take the time to review this study if you don't believe me. Here are a few of the major highlights you'll find within:

• The mean return for native OTC stocks over one year is -33.82%
• The median return for native OTC stocks over one year is -53.9%
• 75% of native OTC stocks declined by 13.97% or more in one year

(A native OTC stock is one that has never traded on a major exchange.)

Take the time to read the entire study and you'll see there's plenty more where this comes from. No matter how you break it down, the vast majority of OTC stocks fail in the long run.

In addition to the overwhelming odds facing long term OTC holds, there are dozens of #wolfpack tweets that are just flat out sickening to look at. If a stock goes down, of course the consensus is that short sellers are attacking it. This is a laughable claim, especially for stocks like $MINE, where the $2.50 rule would make it impossible for shorts to take any kind of meaningful position size. Or sometimes you just see disgusting tweets (and retweets) like the one below:

Yes, this is just your typical promoter BS used to suck in newbies. Of course the chart usually tells the story, and some of the earlier "picks" are starting to look like your classic pump and dump pattern:

There's no denying that both of these picks had considerable upside from the time of their announcement. Perhaps one or both of these can even offer another breakout before the hype is over. If I had a position in either of these stocks though, I'd be asking myself two things:

1. At what price did the "Wolf" and the other #wolfpack leaders buy their shares?
2. How much did I pay for my shares?

It doesn't matter how quickly I react, I'm willing to bet I will wind up paying a higher price every time. I would never convince myself to hold and hope from higher prices, especially after momentum starts to break. I certainly hope nobody reading this ever will either. 

I will continue to treat "WolfOfWeedSt" like I treat anything else on the OTC market - I will trade based off of the chart alone. I love the volume and volatility he brings to the market, and I plan to actively trade his picks, both long and short, as long as I see a high-odds setup to do so. Like the Wolf, I will "ride the wave." I just hope my readers won't be some of the #wolfpack members that will still be riding long after the wave has crashed.

Disclosure:

I am not, nor have I ever been, short MINE, SPLI or FRTD