To OTC Journal Members:
 

An Exciting Event In Recent Times- We Were Right On The Money This Past Week

In last weekend's edition we suggested that the market could be poised for a Summer Relief Rally after one of the sharpest two month sell offs in the history of the stock market.

Our newsletter focuses on ideas on the buy side. It is a bullish newsletter and always will be. Therefore, for the most part, over the last 2 1/2 years we have been on the wrong side. A few of our ideas have provided profitable opportunities for our members, but for the most part nearly all stocks have gone down. Our long term performance has been down there with Goldman Sachs, Merrill Lynch, Morgan Stanley, and all the rest of the Wall Street Powerhouses.

This past week we had it right. The Summer Relief Rally we suggested in our August 10th edition did take place. We suggested two stocks we felt were oversold, and the both traded up beautifully in a rally which kicked off Wednesday afternoon. So, is it time to take your profits?
 

Market Comment

The NASDAQ entered an extremely steep two month decline on May 17th. The drop, a full 32% over a mere two months, would take NASDAQ down to a low of 1200 on July 24th.

After rebounding slightly, and retesting the low at a slightly higher level on August 5th, it seemed the market might be poised to rebound. Nearly 70% of reporting companies beat earnings from the June quarter. It seemed everyone who was going to sell had done so over the two month 32% decline. Short sellers, who have completely controlled the markets for the past 2 1/2 years, were conspicuous in their absence.

Hence, the rally we predicted did unfold this past week on the heels of respectable earnings from many companies. 

We believe the NASDAQ, barring any unforeseen International crises, is entitled to rebound into the 1475 range, another 115 points above Friday's close. This would represent a rebound of 50% of the loss suffered in the steep May to July decline.

However, we believe this is a Bear Market Rally. We believe a new very baby bull market will be born after the perennial October decline. Then the upside bias will come back, but investors will have to accept lower returns for the next five years. Until a next tech revolution develops, growth will be much slower than it was in the later half of the 90's, and stocks will not trade with the excessive premiums enjoyed in the latter half of the 90's. The Oracles, Suns, Microsofts, and Intels of the world are great companies, but today they are not growth companies. Therefore, until the economy improves, they will not trade at the same premiums of past markets.

However, the market will still pay up for growth as it always has. It will be a market of individual stocks where rapid growers will still command high premiums. Everything will not rise with with the tide as in the past. You will have to pick the right companies.

Here is a review of last weekend's two ideas:
 

Flextronics (NASDAQ: FLEX)

As you can see from the chart, Flextronics put in an impressive rally this week which began on Wednesday afternoon along with the rest of the market. The stock opened Monday morning at $7.73, and closed Friday at $9.11 for an exciting 18% move in one short week. In keeping with our theme of a 50% rebound from the May sell off, the stock could be entitled to bounce into the $11.50 range. 

However, we suggest you remain vigilant and liquid. Any significant violation of the support line depicted in red should be met with an immediate sale of the position. You might also consider selling half and holding the remainder in the event the $11.50 mark is reached.

Even at this level the stock is probably undervalued. Despite generating losses, the company only commands a $4 billion market value with $13 billion in annual sales. The average is 4.3 times sales for this sector, so the stock may have considerable upside in better market conditions.
 

Nvidia Corporation (NASDAQ: NVDA)

Nvidia also had a strong week with one hiccup as they released their June quarterly earnings, which was in line with expectations. However, this company was slightly bullish about the future, predicting 1% to 5% growth over the next quarter. Nvidia manufactures computer chips geared primarily to consumer electronics which require impressive graphics. Video game manufacturers are amongst their biggest clients, so their fortunes are tied to the health of that market.

The stock opened Monday morning at $9.10, and closed this week at $10.69 for a solid 17.5% performance. A 50% retracement of the May to July drop would take this one into the $24.50 range, an unrealistic target. However, this number does suggest a great deal of upside in the stock if the market continues to behave well. Like Flextronics, you might want to take half your money off the table as an insurance policy against a big drop. The stock is just above it support line, and a significant break below should be your signal to sell.
 
 
 

Conclusion

The past 29 months have been trying for all stock market lovers. A tremendous amount of wealth has been decimated. People have transferred their wealth to the home, which is more tangible. Even if the value of your house deteriorates in a declining real estate market, there is comfort in knowing the asset is right there when you wake up. It is not a number on a screen which continues dropping for no apparent reason.

The worst is probably behind us barring any unforseen major international crises. The recession has hurt corporate profits, and a few scandals are causing investors to wonder if there actually were any profits in the first place.

The recession was shallow, but the economic slow down persists longer than economists originally forecast. The cycle will head back up, and stocks with it. Investor confidence will come back, albeit it slowly. Look for 2003 to be the first up year in the markets after three down years.

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