To OTC Journal Members:
 

Comments in the BLOG

Apologies to anyone who tried to post a question or comment at the BLOG this week. We had a technical problem of which we were unaware, and it has since been resolved. Feel free to return and post away.

I posted a BLOG entry Friday on HDY, which completed at perfect 61.8% retracement Friday morning and then rebounded right on cue as if the stock had hit a trampoline. I picked up 5,000 shares at $1.75, and intend to accumulate more. If they get the project in Guinea back up off the canvas, there is plenty of upside left in this one.

To use the BLOG, simply go to the home page at www.otcjournal.com - the BLOG will scroll down automatically on the right side of your screen. The most current journal entries appear in the middle of your screen. Check back frequently for updates particularly when stocks are moving to overbought or oversold levels or in volatile markets. Your questions and postings do not automatically appear, so don't bother posting the same question multiple times. I personally go through to moderate and respond to every question.
 

What's Wrong With The Market?

I was astonished by an interview I watched on CNBC earlier this week. An analyst named Thomson, coincidentally from Thomson financial, expressed his view that the market was absurdly undervalued. As he pointed out, the PE on the S&P 500 today stands at about 11.5, the lowest since November of 1995. The EPS growth rate for the S&P 500 is expected to be 12.5% over the next 52 weeks, and operating earnings for the S&P stand at $84.40, the highest in history. This, against a backdrop of low interest rates, left him scratching his head.

Where do they get these boneheads? Don't they understand what's going on with the economy? Here's the real problem:

Energy companies represent 10% of the S&P 500, but right now they represent 72% of the earnings growth. Energy companies are enjoying windfall profits. Their revenues have risen substantially, but their costs have not. The other 90% of the S&P 500 is sharing 28% of the earnings growth.

The big negative: What's good for energy companies is bad for the economy. Rising commodity prices muzzle economic activity. The ugliest word to Wall Street is now rearing its hideous head: INFLATION. There are two things the market hates with a passion: Inflation and uncertainty. Right now there is a lot of uncertainty about inflation.

The good news: It's already priced into the market. That's why the PE on the S&P 500 is 11.5 with earnings at an all time high. If commodity prices can simply stabilize, we can return to some semblance of normalcy. If they pull back, it will be a major positive for stocks.

The market was clobbered in October, which is generally a reasonable month. September is usually the worst month of the year. So, how do we make money in the microcap market as we try to slug through the current environment? One way can be found by looking at a few of this year's examples:

Trampoline Stocks
 

If you have teenagers you have heard this song- over, and over, and over again. It's the hottest thing on the Rap Charts. Strangely, Mike Jones' lyrics apply to today's microcap markets.

Consider the following charts. All OTC Journal featured ideas. Learn from history:
 

In this market environment investors are irrationally raising cash at any cost. Microcap valuations are as cheap as I can remember them. Volume is anemic. When stocks get sold down this low, trampoline bounces can easily occur. 

The charts above show 6 different OTC Journal covered ideas. The blue arrows represent what would have been the perfect time to buy, and the blue circles represent the opportunity to sell for a quick profit.

Each one of these stocks had the following in common: They were all cheap and no one wanted them. The stocks were trading at technically oversold levels, and each had a positive fundamental development. Also- in each case the gains did not hold and the stocks retreated to previous support or even a little lower.

This is the kind of market environment we currently have to endure. Oversold stocks can bounce with the right event, but the gains don't hold.

The only viable strategy for making money in this microcap environment is to hold your nose and buy them when they are cheap, trading little volume, and oversold. Then wait for the big rally. Don't buy when you read about a big event in the OTC Journal. Identify your favorites, and buy now.

And, oh yeah, don't forget to sell when they run up the charts.

Take VTSI for example. This past week the stock opened at $.147. Wednesday morning the big news hit. The stock traded up to nearly $.21 that day. If a NASDAQ stock had opened the week at $14.70 hit $21 in one day, every talking head on CNBC would be covering the event. 

You could have accumulated the stock for the past month in the $.12 to $.14 range, and scalped a nice 53% profit in one day had you been watching, waiting, and pounced on the move.

Until this trend less market resumes a consistent climb, we are destined to watch stocks surge and fall back. Until that time, there are lots of OTC Journal stocks that could break out from current oversold levels and offer you a chance to make a quick profit.

My current favorites for this kind of breakout scenario are DSEN and BPTR. These are good choices because they are both cash flow positive. This minimizes the downside risk. KAL and even beleaguered FMLY could also be ripe for short term bounces. HDY is another that could repeat its early October performance easily. Don't forget NWWV, NWKI and HESG- all three have enjoyed temporary surges at one time or another, and all are very oversold and ripe to bounce. I would avoid AMW until numbers come out. That one could have one foot in the grave.

November and December are positive months in the market 84% of the time. We need them to come through this year. If not, 2005 will be looked back on as one heck of a lousy year (sans energy).

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