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I'm a full time trader, investor and researcher. I'm a Financial Management graduate and I live in Brazil. My reports and comments published on Seeking Alpha should not be taken as investment advice, they are for research and informational purposes.
  • Why PacWest Equities Inc Stock Is Ready To Collapse 0 comments
    Nov 9, 2012 6:35 AM | about stocks: PWEID

    As a stock trader one of the biggest lessons I learned about stock prices is that parabolic moves are to be sold into not bought. Human nature though is hard to overcome, when things are going parabolic our "instincts" tell us to buy, we fool ourselves that we will buy and sell it quickly and walk out with a quick profit(The so called greater fool theory). The issue is, once we have that profit its very tempting to continue to hold but the fact is that corrections from parabolic moves are usually vicious, fast. This is specially true in OTC stocks where instant fills are extremely hard to get specially during a panic

    The company is trading at about $1.92 pre-split with a market cap of about $1 billion dollars

    Infitialis and Michael Goode has both provided very solid fundamental reasons on why OTC:PWEI (OTC:PWEID) stock is almost completely worthless

    seekingalpha.com/article/927251-pacwest-...

    seekingalpha.com/article/982611-15-more-...

    I won't expand on that front because they did a great job. I don't even believe most shareholders care about the fundamentals of the company anyway. You have to understand that mindset of a OTC promo buyer "investor", this is all about a greater fool game specially when the stock has had a long period of increases. People are in just for another 10-20-30%, there don't care that the stock is completely worthless and the company has no real business. All one has to do is check places like IHub and see what kind of financial IQ most investors in the company have(Hint: Its not very high)

    What they do care though is that the momentum game continues and they can get out at a profit before everyone else sells, this is the whole game here, selling before the other people sell. I'm going to present evidence on why PWEID is now close to reaching the point where everybody will head for the exit at the same time. Lets check some of the most successful stock promotions of all time and which price action lead to their collapse

    (click to enlarge)

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    One thing you can notice is that when prices goes parabolic this is usually a good time to sell NOT to buy, this is specially true when a stock promotion has been going on for longer than 1 month. At some point both the promoters and "investors" will want to take profits which leads to a cascade of sellers. What is also noticeable is that slow and steady price action can be followed by huge declines, this type of price action leads to complacency from investors who just buying counting on their "sure" gains till one day things reverse and everybody heads to the exit at the same time. PWEID has only has 1 decline in all its history(And it was a huge one). Volatility expansion is also a sign that the peak is near

    Lets look at PWEID action and see what can be inferred

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    Chart is adjusted for the split. You can notice that the stock had a long period of slow and steady action then went parabolic after the stock split on monday(When the stock rose about 40%), this is VERY worrying price action, specially when combined with yesterdays decline, that was the second decline ever for the stock and the first in a long-time. As people start to think the stock is headed for a correction, we could see an avalanche of sellers. Contrary to what the promoters say this stock is NOT heavily shorted because it is in Reg SHO, its very hard to get a borrow and short it, as a result once it collapses you won't have short covering rallies to any meaningful degree

    This promotion has been running now for about a month, successful promos don't usually run for much longer than that. You can check old promos and see that after 1 month most of the gains have been realized and the stock faces a large wave of selling at some point

    Furthermore the market cap of the stock is now over $1 Billion dollars(Once you factor in shares outstanding plus issued for acquisitions), this is probably the highest market cap for a pump and dump scheme of all time. High market caps act as resistance for the stock since it permits stock promoters and insiders of the company to sell worthless stock and realize a very large profit

    Conclusion:

    PWEID now has gone parabolic and its volatility has expanded, judging by how this type of price action has been met with selling(Usually large and quick selling) most of PWEID gains look like they have been realized. The greater fool game is now coming to a point where the people will actually have to face the fact that virtually everybody knows that this company is fundamentally worthless and they will all try to sell at the same time, whether they will be able to is another question but history has not been kind to this type of speculative game. The complacency of investors due to the slow and steady action combined with large quick gains will only feed into the selling because that kind of action draws a lot of people into playing the momentum game but at some point everybody will try to realize their gains and the stock won't have enough short sellers and true fundamental investors to bid for the stock once it collapses. The correction is likely to be vicious and large

    We rate the stock a strong sell

    Disclosure: I am short OTC:PWEI.

    Stocks: PWEID
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