Why penny stocks hitting upper circuit since last few weeks?

After falling sharply in March, Indian stock market has seen a good buying from lower levels.

Main Indexes like Nifty50 has gained more than 35 percent from lower levels, indicating strong inflows in market at lower levels.

When main Indexes will rise with such percentage, it is quite normal to see similar buying in stocks also.

But, do you know that there is a specific category of stocks in market which has outperformed all other categories and has even got doubled in last few weeks!!!!!

I am talking about those stocks which trades for less than 5 rupees.

We can call these stocks as Penny stocks or NCLT stocks (if the company has been admitted to NCLT for Insolvency and Bankruptcy proceedings or may admitted soon).

Things were going as usual and these penny stocks were trading at their regular levels. However, from around mid May of 2020, many stocks from this category started seeing some buying interest.

Continuous upper circuit for 10-15 days is normal for such stocks when share prices have gone down too much from their normal price range.

But it is not normal when the upper circuits have lasted for almost 1 month!

Because of this, most of these stocks have got doubled from recent lows and many have also turned into multibaggers within a very short time. Just 1 month!!

Here is a list of some penny/NCLT stocks which have delivered multibagger returns in recent weeks.

Beside of this list, there are many other penny stocks which recently turned into multibaggers.

Those penny stocks which are in upper circuit because of their own postive news don’t need any discussion. We need to examine those penny stocks which are going up without any specific news!

There could be any positive news which is boosting these stocks, which is still private and not in public.

Beside of news, there could be some other things also which are helping these stocks.

Is someone trying to level up after good rally in markets?

After making a low around 7500 level in march, Nifty50 has gone up by almost 35 percent and is currently quoting around 10,000 levels.

After this positive trend in market, it is possible that any big player may have become interested or started liking penny stocks/NCLT stocks, considering their rock bottom valuations, low downside risk and possibility of huge upside if the company successfully taken over by a new investor.

Therefore, they may have started purchasing these shares from lower levels!

Is someone trying to level up the penny stocks before public make entry into them?

Quite possible!

After two consecutive successful restructurings of Ruchi Soya company and Alok Industries, many retail investors now wants to have some penny shares in there portfolio. Why?

Ruchi Soya and Alok Industries restructurings have again raised the hope that Penny stocks (which are in NCLT for Insolvency & Bankruptcy proceedings) have strength to outperform the market once such companies will have a new owner, and prices of 1-2 rupees are not correct for them.

Ruchi Soya and Alok Industries both have ran sharply after their restructuring!

While Ruchi Soya has gained more than 45,000 percent, Alok Industries has also gained more than 1,000 percent, from recent lows.

This unsual percentage of return is enough to attract many retail investors!

In past 2-3 months, many new retail Investors (beginners) have also joined stock market to invest their money. And many existing retail investors have also pumped new money in market after recent crash (which had took place in March) .

So, there is a large portion of money and investors who can enter in such stocks.

Because of these reasons, it is possible that someone is buying them and trying to level up before public level up them.

It could be Operator Game also!

Yes, it is highly possible that operator or someone (having money strength) is buying them at current levels to attract new investors! Considering recent cases of Ruchi Soya and Alok Industries, it will now be more easier to attract small investors in penny and NCLT stocks.

The likely Game of Operator would be. . . . . . .

At some point, after raising the prices of penny stocks, the operator will try taking a silent exit from these stocks by selling its shares to those investors who are placing a bid everyday to buy some shares of penny stocks.

And at last, many investors will get stuck in these stocks at higher levels.

Is positivity in Anil Ambani Shares impacting the prices of Penny and NCLT stocks?

If you are new to stock market, then you might not know about the episode of Rcom-Jio deal.

Let me tell you about this in brief.

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During last days of December 2017, shareholders of Anil Ambani shares saw something which they had never expected.

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All stocks of Anil Ambani were either sideways or falling continuously and most of the market analysts were negative on Group companies because of several Debt issues.

However, when last week of December 2017 started, Anil ambani shares suddenly started spurting!!!

Stock of Rcom gained almost 40 percent on the first day of its spurt! Other Anil ambani shares also witnessed good buying.

Other days of the week gone similar to the first day for and shares of Rcom company continued to outperm whole market. Within a week, stock had seen over 200 percent rally.

Everyone was trying to find out why Rcom is rising with extreme buying even without any news in market.

Thereafter, when Year of 2017 was about to end, on Dhirubhai’s birthday (father of Anil and Mukesh Ambani), Anil Ambani announced a Deal with his brother Mukesh Ambani to sell Rcom’s assets.

On the next day of this announcement, it was obvious to see another great buying in Anil Ambani shares. However, beside of rally in Anil Ambani shares, many other similar stocks (which were facing debt issues) also got a hope and started their monster rally.

Many shares even hit 20 percent upper circuits for few days and many reached to 52 week highs after Rcom-Jio Deal announcement.

Above Chart shows how other stocks had started moving up when Rcom stock spurted (blue line)

In recent Market crash of March month, shares of Anil Ambani had started trading in penny price and they are still going through Debt problems.

Like at that time, Anil Ambani shares recently have again seen a good rebound from lower levels and are now rising constantly.

So, like anil Ambani shares were able to generate a hope in other similar shares in 2017, it is quite possible that Ambani shares may have generated a same hope again in the market and therefore other similar stocks (which are penny or NCLT stocks) are also witnessing good buying.

That were the four things which I think could be the possible reasons behind the buying we are seeing in Penny and NCLT stocks.

Beside of what we discussed above, there could be other reasons too which are boosting share prices of Penny and NCLT stocks.

Also Read: Can Indian Stock Market crash in 2020 again?

What should you remember in this rally in penny shares?

If you don’t hold any share of such stocks, then it is good and you can continue to avoid them.

However, if you are willing to have some shares of such stocks, then you can follow this thing.

Instead of directly going into those stocks which have already gained good percentage from lower levels, you can try finding those stocks which have not participated much in ongoing rally in Penny stocks yet. Use these filters to find them.

• Having Good book value.
• Has price to sales ratio of below 0.30.
• Penny in size and price.

If you find yourself unable to find stocks using above filters, then you may consider staying away from these stocks.

If you hold some shares of such stocks, then it will be a good decision if you keep selling your shares at some specific levels or in a pattern. As the share price goes up, keep reducing your holding in it.

By doing so, when you will left with that amount of shares which is like neglible for you, (if you wish) then you may consider holding that for long term. And if you want to take complete exit, you can execute this thing also.

Remember, shares which are in NCLT for Insolvency and Bankruptcy proceedings and have nil/minus book value are not good to hold at all unless there is something special in the business which can attract an investor.

Also, keep in mind that taking entry in such stocks at higher levels will be very risky for you.

At last, I would say that it is not a big deal in stock market to develop a trend in several stocks just to fool small investors and dump them shares at higher levels.

So be cautious and don’t even try to use major part of your capital in such stocks. You may lose all that capital in a very short time.

Hope you take good investment decisions.

Good luck : )