Buckeye Technologies (BKI)

Company. Buckeye Technologies manufactures and markets specialty cellulose and absorbent products. Think: disposable diapers, feminine hygiene products, etc.; food casings, rayon filament and acetate plastics, thickeners for food, cosmetics and pharmaceuticals; air and oil filters, premium letterhead, currency paper and personal stationery.

Buy. BKI had reached a 52-week low in March at the end of a long, steady, unmistakeably downward trend. When it started to reverse and go back up again, it got as high as $5.50 in early May before falling back down, rallying, then falling back again.

The stock finally closed above $5.50 on the third try on May 27. On the 28th it traded briefly lower again, but held above $5.50. Two indicators I pay most attention to had both reached a critical level: ADX greater than 20 and headed up, and Chaikin Oscillator above zero and headed up. I bought.

I immediately began to suffer pangs of anxiety, because the number of shares traded every day fell to practically nothing. One memorable day, only 400 shares changed hands in the first six hours of trading! Yikes — talk about "illiquid, Fool!" Then BKI starting moving up in giant steps.

Sell. I'm probably going to regret selling BKI when I did. It had fallen only 5% from its high after I bought, a point at which my "rules" say to pay attention, but hold on. The 50-day moving average is closing in on the 200-day average. Both indicators are still very positive. But I sold nevertheless: I've been uneasy about the low volumes most days; it started to fall so dramatically on a generally positive day in the market; there was a juicy profit to be had that would offset a couple of other stocks in my portfolio which sank below my limits last week while I wasn't paying attention.

My suspicion is that today's drop is a temporary "correction" while people do some "profit taking" after such a nice run-up.

Volume is a quite tricky issue. If too few shares change hands every day, it may be hard to sell when you want to; this is especially true since I generally deal in lots of 1000 shares. If only 40,000 shares trade on average, 1000 shares is over 2% of the entire volume. On the other hand, if a lot of shares are traded, the stock starts to get noticed by The Analysts, who then feel compelled to offer their Opinions and set Expectations and give Recommendations. Then, if one of The Analysts disses the stock, or if the company reports earnings that Miss Expectations, the market may react quite unexpectedly.

It's a trade-off:

Low price, low volume stocks

Potential for significant price increases and juicy profits versus risk of lower liquidity and relatively less information and "expert" opinion

Higher price, higher volume stocks

Generally more liquid, easy to trade, and more information is available versus susceptible to influence by opinion makers and proportionally smaller returns (less bang for the investment buck)