LEXG Pulls Back

Today we saw of reversal of mass proportions on Lithium Exploration Group (LEXG.OB). The run that led penny stock traders to the promised land, and finally turned sour. Now, I will be the first to say that trading volatile penny stocks and microcaps is one thing, and owning them for the long term or even a mid-length swing trade is another. I will also admit that we add names like LEXG and other volatile names to our list of stocks all of the time. But, when is enough profit enough profit ? Why would somebody who bought at 3 or 4 not sell at 9 or 10 within a week ? In our stocks to watch pieces, we research names that will be newsy and volatile, often before the moves happen.

Yesterday’s trading action in LEXG showed us, in Alan Greenspan’s words, “Irrational Exuberance”. The point I am trying to drive home is that there is difference between holding Apple Computer (AAPL:NASDAQ) after it makes a 200% move and even the best penny stock. Common sense tells me, that if you have a double in a hot penny stock, you have to take something off the table. No matter what, the PR’s, or message boards say. This morning, LEXG was actually up fractionally in the pre-market and then an onslaught of selling followed. The stock tried to mount some support at the $9 level in the early AM, but once it broke this once massive gain became a falling knife. It hit a low of $3,50 and bounced and is now stuck in a quagmire between naked shorts covering, day traders scalping, and blown up longs throwing in the towel.

I will not go as far as to say that, LEXG is fake, but to invest long term in any company with this type of market cap and miniscule revenues, is usually insane. Especially after it’s run up.

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Midday LEXG Update

This piece is nothing more than a quick update on LEXG. Today the stock hit the $10 “psyche” number, and we mentioned that the level was in play in our stocks to watch entry. I have to admit that this run has been insane and I can’t remember the last time I saw a penny stock over $1 explode like this on a 5 trading day run.

There have been have been a couple of PR’s , regarding the advantages of Lithium production in Alberta and some meetings in Chile. However, it looks like a combination of supply and demand and naked short covering have taken over on the former penny stock. How high does it go ? We can’t really say, but at the time of this entry, the total of individual trades should easily exceed 10k today.

Despite the strong PR behind the stock, another factor could be looming. It’s called naked shorting. From my experience when some of these low priced names run up, they are shorted on a naked basis by a sect or the trading community. And sometimes, when these naked shorts run up against an exceptionally strong stock that has developed a cult following a short period of time, the result is very simple. The naked shorts get squeezed and the one’s who are less solvent get bought in. I am not making a call on this one, but since this run is less than 7 days old you could see some shorts get bought in over the next few days. Once again the run has been fabulous, but at this level it seems like either both sides of this trade are risky.

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LEXG Update

There is nothing to say other than that LEXG has been a penny stock trader‘s dream. Shares of this junior minor have exceeded even the most optimistic views. However, we have to ask ourselves two things. Is a triple in a very short time period enough ? Or does this super hot penny stock make a play for the $10 “psyche” number.

Personally, other than day trading the name, buying after a triple (almost a quadruple) is often the last leg of irrational exuberance. I am not trying to be negative here, but taking a profit after such a huge run is never a recipe for disaster.

On the other hand, you may be witnessing a classic naked short squeeze. Market makers for instance can legally short stocks that are hard to borrow. However, individual investors can’t, but also play this game, but illegally through what are called DVP accounts. Through this type of account, traders can sell with one broker without actually borrowing shares, and buy with another. Unless there is an audit of time and sales, these illegal trades slips often through the cracks.

I will elaborate on shorting penny stocks in a future entry, but right now LEXG should absolutely be added to your penny stock list. Even if you don’t buy it. LEXG is a great lesson in market mechanics. In other words, the company is not a major revenue producer, but at the time of this entry, has a market cap in excess of $300 million, which is more than many, more established mining stocks that are listed on the AMEX.

In closing, LEXG’s lack of fundamentals may not matter if the short squeeze continues. LEXG issued some savvy PR’s, but good old supply and demand has been the catalyst. So if naked shorts are forced to buy in, this one could see 10. If they are already wiped out and have thrown the towel in, LEXG could easily go back to $4.

So keep an eye on LEXG, even if you are not going to get involved. The shares have provided a great lesson.

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