If you follow my blogs or my chat room rants, you hopefully are aware of some of the most important concepts I believe are playing out right in front of our faces in the markets and most specifically the OTC market. If I could best simplify the most important stuff, it might look like this:
-Starting around 2018 but especially into 2020 and 2021, an unprecedented amount of capital began pouring into the OTC markets.
-By 2021 a theme in the OTC had emerged, with the SEC requiring old shells and defunct tickers to clean up their act and get current, or else get delisted. This caused a flood of tickers to get cleaned up in attempts to become viable shells for potential mergers/acquisitions/joint ventures.
-Through the hype many tickers ran on news of potential mergers and Letters of Interest (LOI), but in 2022 reality set in and for a number of reasons the markets cooled off dramatically, and in the OTC that meant a lot of tickers which had ballooned their market caps to levels way beyond where they realistically should have been valued at were now free-falling as more and more longs bailed and the selling picked up.
So that brings us to the here and now. The overwhelming consensus in the OTC at the moment is that it’s dead and 2021 was fun while it lasted but is now a distant memory and 2022 is responsible for killing the beast.
It was nice, but now we’re back to the old ‘normal’ OTC market. Right? Wrong!
When a stock breaks out to new record highs, what does it often if not usually do after the initial buzz wears off? It retraces and comes back down to earth. The old breakout level is often tested for support, ie old resistance becomes a new floor. Nothing moves straight up or straight down, and after a big breakout it’s very common to see a period of pulling back and consolidation. This is normal and healthy, and what happens is it shakes all the easy money chasers out because that’s how markets work. The lull after the initial breakout to new highs is THE best time to start watching, plotting and possibly bidding on the next entry.
I don’t know why retail is so predictably short sighted, but they are. They love to jump on the breakouts that are already sky high, and then they’re easy targets to get shaken out. Then they move on to chase the next hot thing, while the stock they just sold at the lows is making a floor and setting up great entries for the next round of dip buyers and smart money.
If you take nothing else from this post, just remember this: The initial lull, dip or shakeout after a significant breakout is very often one of the best times to get interested in going long or at least watch closely.
So with that concept in mind and everything I mentioned so far, let’s look at the $ volume in the OTC market by year, for the past 10 years:
As I mentioned before, starting around 2018 the $ volume in the OTC picked and broke out to new all time highs and it peaked in 2021 with $109 billion traded. Now look at 2022 and what is interesting to me is that by historical standards, it’s still a very strong year (second only to 2021) and that figure doesn’t include December which hasn’t been updated yet. Thinking back to my example of a stock breaking out to new all time highs, what often/usually comes next? Pullback, consolidation, shaking out, etc. Call it what you want, but price action (or in the case $ volume) doesn’t go in a straight line forever. In fact, healthy sustainable moves have to have corrections to properly test and vet the market. I’ll say it again, it’s the lulls after the initial breakout where you need to really pay attention, especially when the retail market loses interest and moves on (which is ironically the best thing that can happen in the big picture).
If the point wasn’t obvious already, I hope it’s getting there. 2022 felt like one of the worst years in my 17 years of trading the OTC. It felt dead and barren and all of the hot money moved on, yet looking at the chart here you can see that there was still quite a lot of money moving hands – in fact it was the second highest $ amount next to 2021. To put it another way, 2022 was the healthy digestion and consolidation of the breakout move which began in 2018, and now the old ceiling is a new floor (higher highs, higher lows) until proven otherwise. I believe the odds that 2023 picks up and furthers this $ volume breakout trend in the OTC are quite high, and that this chart more or less highlights and backs my stance that we’re in a secular bull market in the OTC. The real fun will begin when more and more OTC tickers can break their 2021 peak, and then for the OTC market as a whole to break it’s 2021 $ volume level and confirm the secular bull market is raging. From there it’s anyone’s guess as to what can happen, but I don’t think we saw the peak of OTC insanity in 2021.