SEFE, Inc. (SEFE.OB): Playing the Long Side

Just because I want to warn people about the dangers of pumps, doesn't mean you can't trade them. SEFE Inc., a self-proclaimed alternative energy company based out of Scottsdale AZ, is one such pump-and-dump. A week ago I longed this stock at 1.62 as it broke out. Although I ended up leaving a lot on the table because I prefer low risk trades, I still manged to make a very quick 17+% gain which I can't be too disappointed about. The reason I got out so quickly was because I knew that it would drop eventually. A few days later it indeed dropped ~52% from 2.96 all the way down to 1.42.

This week I am actually long again following the intraday breakout on Friday. The reason I am so confident that this stock will continue an upward trend despite the big drop earlier in the week is because of the people who are pumping it. This particular pump is being conducted by Stock Market Authority (SMA). They have a great history of controlling a stock in such a way that they can squeeze shorts and thus get the share price up even higher. A short squeeze is just when lots of shorts are forced to buy to cover, usually because they become scared by unexpectedly bullish price action. In this case it is likely that a large number of people sold short this stock following the drop, in anticipation of more downside (a big drop is often a reliable indicator of more downside in a pump). It is my belief that SMA will attempt to recover the stock price from this fall. Thus, all of those people who are short will be in the red and panicking. A few of them might then cut their losses by buying back the stock to cover, pushing the price up. This causes a positive feedback loop because each scared short that buys to cover and pushes the price up, scares the rest of the shorts who then in turn by to cover. The result is a very quick spike in share price. The best example of this type of short squeeze is one of the most famous pump and dumps which was also conducted by SMA; Lithium Exploration Group, Inc. (LEXG).

LEXG went from around 1 dollar to over 10 dollars in little over a month which is what makes it so well known. It is unlikely that such a return will be repeatable with SEFE but it does illustrate the power of short squeezes nicely and the ability of SMA to exploit them. The much more recent SMA pump that I had in mind when I went long SEFE for the second time was Raystream Inc., (RAYS.PK). This stock had multiple drops yet recovered from each for significant gains.

You may note though that this price action has a sort of "bouncing ball" pattern. Following each drop, the recovery becomes weaker and weaker. Considering this, I am not setting my goal to be an LEXG style sort of gain, but rather a RAYS type gain. Even then though these gains can be quite nice as you can see from the first drop recovery from 1 dollars all the way to 2 dollars, a 100% increase. Within that gain though you can see a considerable drop from around 1.70 down to 1.25 which would not be much fun to hold through. To avoid such a drop I will probably be taking my profits quickly and possibly reentering the stock following such a drop. No matter how you choose to play it though, remain cautious as each of the above examples eventually dropped back to pre-pump price levels.