What is “Passive Income Trader?”

By Travis Johnson, Stock Gumshoe, September 10, 2013

No big stock “reveal” today, but perhaps our blatheration will be of some interest anyway.

We’ve had a number of readers write in asking about a heavily promoted trading service called Passive Income Trader — this is a service that’s been around for a year or two, as far as I can tell, and they’ve even placed ads on our email newsletter a couple times, but I’ve never listened to the presentation before.

So today, I jumped in to check it out a bit. Reluctantly, because this is one of those ads that doesn’t come with a handy dandy transcript … so I had to listen to the whole blessed thing to see what details they shared.

I don’t often cover trading services that are pitching a strategy, particularly a rapid-trading strategy, because I’m not an active trader and tend to default to my bias for long-term investing when I look at these quick-hit services. But here goes …

The pitch is from a guy called Sam Johnson, who is apparently the trader who “discovered” this trading strategy for profiting from “parabolic moves” in individual microcap stocks. I presume this is a pseudonym, since unlike most of the Market Authority (that’s the publisher) newsletter personalities he shares no picture (they do have some real and experienced newsletter writers, FYI, they publish letters from Charles Mizrahi and Ian Cooper, both of whom I’ve covered in the past in their work with other publishers).

Sam starts out by building a perfectly reasonable case for the existence of parabolic moves in different markets (tech stocks in 1999, gold in 1979, housing in 2006, etc.), and then saying that he can help you profit from these kinds of parabolic moves.

He does that by grossly simplifying the situation (also pretty common in hyperbole-filled teaser pitches), and by making the connection that parabolic moves of large sectors over months and years are similar to spikes in individual microcap stocks over a matter of days:

“Parabolic moves are caused by the exact same thing: a story …

“Parabolic moves in assets happen when large groups of investors buy into the story”

He then makes comparisons to the tech boom of the late 1990s, when every cab driver was also a day trader, and to the housing bubble when you were starting to wonder whether you should move to Miami and start “flipping” condos for quick profits — he could have gone all the way back to the tulip mania or the gold rush, I guess, and there is certainly a tendency in human nature that creates bubbles of “I don’t want to miss out.” I won’t argue with the existence of story-driven bubbles, whether large or small, we see them every day.

But this is essentially a rapid trading service we’re talking about — the “passive” part comes from the fact that they issue roughly one trade alert per month, you put in your buy and immediately also put in your sell order for the target price, and you’re done. Assuming the stock gets to your price and is sold. So how do you profit from a parabolic move in a little tiny stock?

“You get rich by getting into assets BEFORE the stampeding crowd … and by getting out of them at the start or middle of the parabolic move that comes right before the inevitable crash. That’s why what I’m about to show you works so well.”

“I found something that happens every month or so that creates a big market story in a small sector. This event causes quick, bubble-burst cycles to happen like clockwork. So I just invest in the start of a parabolic move, sell before it peaks and walk away with 22.6 percent profit on trade after trade. And totally avoid the bust at the end.”

This thing that happens “every month or so” is a catalyst that drives a specific stock — but it’s not a catalyst that generally has anything to do with the stock itself.

“I found a source of stocks that have gone up in price 94 percent of the time when a very specific catalyst event triggers… when this catalyst event hit, it caused more than half of these stocks to shoot up more than 100 percent.”

“… this catalyst triggers on one stock every month … you could see it trigger on the specific stock within minutes of it happening, while the price jump happens over the course of several days, even weeks.”

“What’s the catalyst? Stock promotions… they are PR and marketing campaigns designed to get investors to buy and hold into a stock (something you should never do with these stocks, as you’re about to see).

“There are hundreds of stock promoters, but only a couple of ‘big fish’ who consistently drive a stock price through the roof with their promotions” …

“Investors who fall for these promotions think they’re going to cash in on the ‘next great Shale oil find’ or ‘the next Groupon’ or whatever. That creates a smaller version of those parabolic moves we saw in the U.S. housing market: gold in the 1980s and the NASDAQ during the tech boom….”

So, yes this Passive Income Trader is a service that either has a relationship with a stock promoter and gets in on these promotions early or before the promotion begins, or simply latches on, remora-like, when a promotion happens and rides part of the likely stock move. I don’t know which — it’s not clear from the ad or in their disclaimers and I haven’t asked them. The “before the stampeding crowd” part implies that they have some insider knowledge of when those moves will happen, but these promotion campaigns don’t go out in just a single mailing at a single second.

And the part of the service that makes it seem somewhat feasible is the fact that they’re not trying to predict the whole curve of a promoted stock’s response to promotion, just the first bit of it. They say they focus on getting in early and getting out quickly — with a stated target of 25% gains on each trade.

There are some worthwhile things in the presentation, like this quote:

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“… you never, ever want to hold a stock from a stock promotion for the long term”

That’s certainly true. I’ve literally never seen a single stock promotion that featured a company with any compelling fundamental reason to own it — many of them don’t even have a business at all, they’re just a catchy name, a story, and a ticker symbol, and usually an investor can realize that just by checking their revenue line (usually zero, or laughably small) or reading the disclaimer to see how much someone was paid to drive the shares up. That’s why I don’t often write about these promoted stocks, though I do trot out the occasional “please don’t buy this” article to remind new investors about how worthless the stocks really are.

And the ad goes on to turn it from a warning into a tease:

“The profit opportunity is in the first couple of days. You just want to skim the cream off the top. I set my profit target at just 25 percent so that I can hit my target in the first day or so and not get caught when the bubble bursts at the end.”

He also says that if you try to hang on for the 100-300% gains that many people shoot for when they chase a stock promotion, “you’ll end up losing a lot of money when the stock tanks at the end of the promotion.”

Which is also true — I’ve never seen a stock promotion that didn’t fizzle back out and return the stock to somewhere near where it was trading before it was promoted … or even much lower, in some cases. The companies are generally worthless, after all, and exist only to be manipulated — eventually the weight of that worthlessness brings the stock back down once the manipulators stop pushing it higher.

And he says that the volume is also very high in the first days of a stock promotion — good enough to get in and out, before volume dies off — in his words, “the average volume on the first day of promotion has been about 60 million shares.”

That’s supposed to give some reassurance — letting you know that although this is a microcap, it trades more shares on these targeted days than stocks like GM or Wells Fargo. Which is sometimes true, but what’s important isn’t really share volume, it’s the trading volume in dollar terms — promoted stocks are often in the 5-50 cent neighborhood, so even small individual investors might easily be tossing around 100,000 share positions. Their published track record of stocks they’ve traded includes XUII, for example (the company name is Xumanii, but it’s not being traded because of anything to do with the company so it’s better to just think of it as a ticker), and Xumanii did indeed have two big spurts of stock promotion in May and July this year — the first one gut up to almost 200 million shares traded as it spiked from 10 cents to 40 cents, the second peaked at just over 60 million as it went from 20 or 30 cents to almost 70 cents.

That’s actually pretty remarkable trading volume for a microcap on those two spiking volume days (on most other days during the ebb and flow of that stock promotion it traded between 3-5 million shares), but it’s not all that much money. That’s trading volume of about $12 million on the wildly-out-of-the-norm peak days — average trading volume in GM shares might be $750 million in an average day. Of course, there are no institutional investors screwing around with a worthless pumped stock like XUII, so it’s all individual investors being fleeced and promoters trying to drive up the share price. And folks like Passive Income Trader subscribers trying to grab at a taste of it along the way.

They’re not the only ones, to be sure — there are plenty of investors out there who think they’ve got the world outsmarted, and they think that even though they know these companies are crap they will be nimble enough to get in and out unscathed as the stock bounces around … there’s a bit of a cottage industry in tracking stock promotions, which likely serves the promoters quite well in keeping volume up — there may be as many “promotion traders” who think they’re in the know as there are actual rubes being lined up to buy the junk “for real.”

If none of this makes sense to you, here’s the basic primer: Stock promotions are press campaigns and ad campaigns that tout a specific stock as a big winner, usually because of some breakthrough technology or land holding. Some of them are really advertising by companies themselves, trying to drum up investor interest to drive the stock higher so they can raise more money, but often stock promotions are paid for and run by traders who are unrelated to the target company (at least legally) who are just doing a “pump and dump” campaign — this is the modern day equivalent of the boiler room operation that tries to drive up a stock so that the folks who accumulated a big position earlier on the cheap can sell to the new crop of eager buyers who have stars in their eyes. These ads can almost always be distinguished from newsletter teaser promos because stock promotions are selling the stock and almost always blare the name and ticker in large letters — newsletter ads toss out sneaky hints about real stocks to try to sell their newsletter, stock promotions try to convince you to buy a junk stock. They’re legal, for the most part, as long as they tell you in the fine print that it’s all an ad and that they were paid to promote the stock — which is fine with them, because they know nobody ever reads the fine print.

And though Passive Income Trader says they have studied three years of stock promotion data to come up with their model for how to trade these little manipulated microcaps, it’s hard to be terribly confident that anyone other than the person paying for the stock promotion campaign knows when it will start — and, as importantly, how it will fluctuate and when it will stop. Unlike the crowd mania-driven bubbles of the tech stock market or the gold market or the Dutch tulip frenzy, this isn’t the wild bubble behavior of crowds we’re talking about — microcap stock promotion is usually the targeted scalping of naive individual investors and it is much more controlled, discrete and manipulated than the “madness of crowds” that creates bubbles. Yes, they both have their root in the human love for a trend and a hot story that you’re afraid of missing, but that’s about all they have in common.

I can accept that as long as Passive Income Trader doesn’t have more than a few hundred subscribers it would theoretically be possible to scalp quick returns on the early spurt of a stock promotion — but only if they really are able to catch the largest promotions, and to catch them just as (or before) they have their huge volume days.

If they had, say 500 subscribers and each subscriber wagered $2,500 in hopes of a $500 gain on the day their trade alert comes out, that would be volume of about 2.5 million shares if we’re talking about XUII stock (for example) — so on a spiking day, XUII could handle it if the promoters have conned enough people into buying 60 million shares worth, there would be enough volume to soak up a few million shares of selling in the middle of the action — but on a normal day of five million shares in the middle of the promotion, that would mean the Passive Income Trader folks would be most of the volume … meaning there wouldn’t be someone there to sell when they wanted to all buy at once, nor would there be someone to buy when they all wanted to sell at once. So for even just 500 subscribers, you can imagine that it would be tough to get the “hypothetical” returns that look possible from the movement of a stock — even if the stock really has exactly the move they anticipate, there would have to be a lot of shares traded to make it possible for real-money accounts to actually get buys and sells on their positions to book actual profits. That’s true of any newsletter or service that recommends illiquid penny stock or options trades, the real results can never match the chart, but it’s probably doubly true of wildly distorted promoted stocks.

Anyone — literally — could do this if they knew which promoters were the big ones, what stocks they had been hired to promote, and which stock would have the biggest promotional push in any given week or month. The mechanics of it are reasonable, albeit of perhaps questionable ethics if you’re “in the know,” and you can see how it would work as long as you’re not trying to drag a couple thousand traders along with you and blowing the trading volume out of whack.

But the important thing is knowing which promotions will indeed be big movers and which will fizzle or never get very big or move up before you have a chance to recommend them. How do they learn about these promoted stocks?

“… we’re able to do all of this with about one trade a month, which is the frequency of stock promotions from the top promoter who actually moves stocks.”

Does that mean they’re actually working with that promoter? Or does it just mean that they know which promoter is the best and can jump on his emails the second they start running, and alert their subscribers? I don’t know.

Unless the Passive Income folks are getting their ideas from the promoter before the promotion, there’s no way they can do this on a schedule — they have to wait until they see the right stock promotion, then write up the trade recommendation, maybe run it by their lawyers, and send it out to their subscribers.

Or, of course, they could be the stock promoters themselves or have a close relationship with them — that could make this a really stable and much more predictable business: taking the promotion money, blasting their email lists, and also getting additional income by telling some subscribers beforehand and telling them to sell along the way. I don’t know if that’s what they do, but I do know that some of this publisher’s newsletter/trading service authors have endorsed junk promoted stocks that are in Passive Income Trader’s track record (Chuck Hughes, who helms a service for Market Authority, was also paid to promote ECAU), so there is at least a potential trail of connection between this trading service and the companies doing the promotions. I have not researched exactly which promotions were paid for by whom or scoured the disclaimers beyond that. Mostly because I don’t care — I don’t want to have anything to do with promoted stocks in my portfolio, I would probably not be nimble enough to get in and out at the right times if I tried to do it … and if I were successful, I’d feel slimy for being an active part of a stock promotion. But that’s just me, and I may be naive (or just boring).

And no, I can’t tell you what the hot new stock promotions are going to be — and I won’t tell you not to try to do this kind of wild day trading — you’re all grown-ups, and wild swings of microcap stocks are undoubtedly fun and feel like a trip to the casino. There are a few folks who have very publicly gotten rich from similar strategies, like Timothy Sykes (who tries to play it both ways, tracking the promotion up and then shorting it on the way down), but it’s not investing. I prefer to study companies, to research stocks, to try to profit by choosing good companies that can grow and generate cash flow over time and see their stock price rise because of that fundamental business performance, and save my gambling for the blackjack table and the occasional options speculation. But I also almost rarely make 20% gains in a single day.

So … would you like to be a little cog in the wheel of the stock promotion cycle? Think it’s worth trying to scalp promotions to get quick gains when you notice them in your email box? Ever try out Passive Income Trader or think this strategy will work, with or without being connected to the stock promoters themselves? Let us know with a comment below.

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