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To
OTC Journal Members:
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A Look At the
Markets For the Remainder of the Year |
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The market is in the midst of a bottoming
process. We are probably going into 2003 on the heels of three consecutive
losing years in the market. The NASDAQ would have to finish the
year above 2000 and the DOW would have to climb above
10,000
for the markets to finish in the green. This bottoming process is setting
us up for the next Bull Market. 2003 will be the first positive year after
three losers in a row.
Investors in Blue Chips and mutual
funds will have to adjust their expectations for future market returns
over the next three to five years. 5% to 10% returns in the overall market
will likely be the norm for the foreseeable future.
Economists officially acknowledged
we were in a recession in the Fall of 2000, six months after market action
told us it was coming. Although this recession has been quite shallow by
historic standards, it has overstayed its welcome. Economists had anticipated
the economy would be showing clear signs of improvement by now. Conflicting
economic data has the market confused. One week it looks like the economy
is improving, the next week the data tells us we are still in a recession.
The housing market and consumer spending
have kept the economy healthy. GDP (Gross Domestic Product), the widest
measure of our economy, is expected to grow between 1% and 1.5% this year.
This is better than a shrinking economy, but far below the 4% needed for
a robust stock market.
The growth engine of the 90's- Technology-
has been in a near depression like state for the past two years. None of
the bellwether technology companies have exhibited any propensity for growth,
and in fact many have shrunk dramatically. Most still have healthy balance
sheets, bolstered by cash raised in the massive Bull Market of the 90's.
These stocks have been repriced as value stocks, which is where they deserve
to be. Until clear evidence demonstrates growth is returning, the NASDAQ
will continue to flounder.
At the OTC Journal we believe
the bottoming process will be completed before the end of the year. By
the beginning of next year a new baby bull will have been born. It will
be a very weak and uncertain bull, but nevertheless stocks will generally
be in an uptrend.
It will take some time for this Bull's
legs to grow strong. Leadership will need to emerge, and it will come from
major technological breakthroughs. Some feel nanotechnology (really small
stuff) will be the talk of the first decade of the 21st century. Many believe
major biotechnology breakthroughs are just around the corner. The chip
sector has to do well for a bull market to emerge, because micro chips
run everything.
Until we get past this bottoming
process traders need to focus on market extremes to make profits. There
are several looming events coming before year's end which could provide
excellent entry opportunities on the long side for traders. We shared two
ideas in our August
10th edition which yielded 30% returns for traders in the summer relief
rally we predicted.
Here are three more major pending
events which could provide excellent buying opportunities before the end
of the year:
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The
Anniversary of 911- The Attack On America |
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We believe the market will trade
down in advance of the anniversary of 911. Fear drives markets lower. The
horrific incidents which occurred on September 11, 2001 are deeply imbedded
in the American psyche.
The nation will be on high alert
status. There is already talk of a moratorium on inbound flights from international
carriers on the anniversary of that date. The media will be in a frenzy,
once again replaying the events of that tragic day over and over again.
Terrorists organizations may choose
to strike that day. Terrorism is about creating fear. What event could
create more fear than striking when we are at our highest state of alert?
Many traders will choose to remain
on the sidelines until 911 passes, and buyers will be scarce. The market
will probably drift lower in early September.
If there is some kind of terrorist
attack on or around 911 look for severe capitulation in the market. If
there is no terrorist attack on or around that date, look for the market
to rebound nicely in the latter half of September.
In either case, the psychological
aura around 911 probably represents an excellent buying opportunity for
traders if the market drops in sympathy with the anniversary of one of
the most tragic days in American history.
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War
With Iraq |
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If nothing else, President George
W. Bush is a student of history. After all, his father was President. The
first President Bush was a one term President, and the current Bush wants
to be a two term President.
The first George Bush was a one term
President for two reasons:
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We were in a recession when it was time
to re-elect, and people vote their pocketbook.
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There was a perception amongst the American
voters that Bush did not finish the job in the Gulf War of the early 90s.
Many felt we should have invaded Iraq and gotten rid of Saddam Hussein
while we were there.
If Saddam Hussein is in possession of
weapons of mass destruction, very few would argue this represents a serious
threat to the American way of life and world peace.
We believe the invasion of Iraq is
inevitable. It is going to happen. The White House continues denying the
President is working on invasion plans, but Vice President Cheney and Defense
Secretary Rumsfeld are trumpeting the cause in nationwide speeches. The
White House is preparing the country for the invasion of Iraq.
If we attack Iraq the market will
tank. The total capitulation phase everyone has been waiting for will arrive,
and the bottom will be established. Oil prices will go through the roof,
and energy companies and fuel saving technology companies will come up
on every radar screen.
This capitulation will be the ultimate
buying opportunity, particularly if this phase of the war on terrorism
goes well. If this scenario plays out we will try to bring you a few oversold
situations likely to bounce hard.
If this war is going to happen, it
will likely be before the end of October. Bush knows his popularity soared
thanks to his tough stance and decisive action post 911. This popularity
has been eroded by the sheer magnitude of the corporate scandals that have
come to light this year. The Republican party favors big business, and
it's been a bad year to be affiliated with big business and Wall Street.
A decisive strike into Iraq before
the November elections would restore Bush's and Republican popularity.
The motivation to go to war will not be politically driven, but the timing
could be politically expedient.
Keep some capital on the sidelines
for outstanding buying opportunities if we go to war with Iraq.
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The
Perennial October Sell Off |
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The market sells off every October
in memory of the 1987 October stock market crash. It's irrational, but
it's a fact. It just seems to happen every year.
October is earnings season. Most
companies will meet or beat expected numbers, but stocks will trade on
statements of future growth. Few technology companies will project an improving
climate, and this will hurt stocks.
Nevertheless, October has consistently
proven to be a great month for bargain hunters. August is traditionally
the worst month of the year for stock market performance, but November
is the best.
Therefore, traders would be wise
to keep some capital available for this year's annual October decline.
In fact, if it is in conjunction with war on Iraq, we could get the high
volume capitulation the market has been waiting for.
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Conclusion |
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These are exciting times. Times of
great change driven by market, cultural, and political extremes.
Investors near retirement age who
had their life savings in the market have been severely damaged by this
ugly bear. For younger investors with ten to forty years of earning power
ahead of you, this cataclysmic three year bear market has been heaven sent.
Over the next five to ten years,
the stock market will once again outperform all other investments. It is
starting from a level where upside potential abounds. If you haven't done
so already, begin a program of regular investing in the market for retirement.
Over the next ten to twenty years this strategy will serve you well.
Looking out over the remainder of
the year there are several pending events which could represent outstanding
buying opportunities. If these events come to fruition we will try to bring
you some great short term ideas.
We will continue to cover ideas in
the penny stock arena regularly. This area is least vulnerable to short
term market volatility as there is little institutional participation,
and penny stocks seem to want to perform in the current market environment.
Of course, these predictions are
just guesses based on experience. Anything could happen. Our opinion and
$5 will get you a cup of coffee at Starbucks. Nevertheless, it gives you
something to think about and plan for.
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