To OTC Journal Members: 

China has been going through a corrective phase, but our ideas are holding up. There's a disconnect going on between what's happening on the Shanghai Exchange, and the way US listed China based companies are trading, and I'll cover that in a future edition.

In short, the US versions of China stocks are trading at very low valuations- the Shanghai market got bubblelicously over valued, and is coming back down. This divergence will normalize over the coming months, and the upside is in the US traded versions of China companies.

Here's an update on my three smaller China followings- UTA, CGYV, and NFEC along with some comments on an ideal scenario for a market correction. Welcome back from summer. The fun is about to start.
 

A Perfect World For The Markets

September- traditionally the worst month for stocks. September sets us up for October, which is usually the rally month. Sometime during the month of October, the market rallies and generally heads north until it's time to "go away in May". October to January is the best time for microcap stocks.

There was nothing normal about Q4 of '08, so the cycles seemed to be skewed. We might not have our usual September sell off, as the summer was anything but its normal benign self. The September sell off is nearly Biblical by US standards. It's roots can be traced to a lack of liquidity at the banks in September. In the 1800s and into the 1900s, banks used to loan out all their reserves in the Fall to the farmers so they could bring in their crops. By the time October rolled around in into November, the banks would re liquefy and have money to loan, which effected the markets.

October has been the bear killer. The last 6 major bear markets have all died in October, and perhaps this year will follow suit. I think the Bear market is over, but the current bull is very young and standing on shaky legs.

To have a strong Q4 and move the markets forward from there, I believe we need a real correction in the magnitude of 10%. Here's what I would view as a perfect world. The S&P 500 is holding at the 1,000 level now. It has made a pretty good run since the March low- up from 670 to 1050- a full 56% move.

The Fibonacci 38.2% retracement of that move would take us back to just above 900, which would be a 10% sell off from here. The sooner and faster this happens the better as far as I'm concerned. There's a gap in the daily chart at that level as well. If this correction materializes, it would set us up for a strong, multi month rally starting in October. It might or might not happen- but watch for it.

Here's something to look for- the media. The media, especially CNBC, will be chock full of pundits claiming the world is still coming to an end, the market was way ahead of itself, and unemployment will prevent any real economic recovery. This is exactly what you want to hear for the Bull to come back. That fear will be like dry tinder to a hot Bull market.

Watch for this scenario to develop- it might not. There might not be a significant correction. I simply believe it would be ideal.
 

Universal Travel (NASDAQ: UTA) Head Fake?

If you followed my trading buy recommendation on UTA last week, you should have been disciplined and be out right now. My entry level was around $10, with a stop loss for traders at $9.50.

The stock swooned down to a low of $8.71, and has since rebounded to $10. However, there was a substantial amount of technical damage done here, and I suspect rallies will be met with more selling as the momentum players come out of this stock and are replaced by value investors. Once that cycle has been completed, the stock will come roaring back and the momentum players will buy again. 

With an estimate of about $1.10 in EPS this year and a 50% annual growth rate, this stock won't trade under $10 for long. I'll be looking for a volume dry up and some sideways trading before suggesting it's time to get back on.
 

China Energy Recovery (OTC BB: CGYV) Starting to Recover?

CGYV had its first positive development in sometime this morning pre open. The company announced a new contract in the amount of $4.47 million. There was a delayed reaction in this stock to the horrendous Q1 numbers, and a correction has already happened. 

Look for this one to firm up as we move through September and get into the Oct to Dec time frame. Right now, on CGYV, I would be a buyer if it were $1- a seller if it were $2. If the company gets its "MO" back in the second half of the year, it might finally get to the levels of $4 to $5 I originally envisioned for this stock.

Click here to read today's release.
 

NF Energy (OTC BB: NFEC) Gets Upgrade- $10.50 Price Target

NFEC is well on its way to some sort of upgraded listing. It is holding up quite nicely in the mid $5s right now, and as I have mentioned in past editions appears to be positioning to an upgraded listing on the AMEX or NASDAQ.

Today, just prior to the open, NFEC announced the completion of another $1.2 million contract in their highly efficient energy control systems business. More importantly, analyst Marc Robbins published an update last week after the company announced a $40 million contract extending over 15 years. 

Robbins rates the stock a "strong buy", and forecasts $.65 in EPS this year. I have the research update for you. Just Click Here to read it. New price target: $10.80. 

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