To OTC Journal Members:
 

Comments in the BLOG

No new comments in the BLOG, but next week could be fun. The NASDAQ's great wall of China, the 2100 level, finally cracked for the first time in months on Friday and is trying to trade into positive territory for the first time in 2005. The first trading day of the year was January 3rd, and the NASDAQ closed at 2152. Yesterday the NASDAQ closed at 2113. It was the first close above 2100 since January 5th.

We could be headed for a nice summer rally. Oversold microcaps are starting to trade up. July 15 could turn out to be last year's August 15. For those who need a refresher, microcaps sold off April through June of '04, traded sideways in July, then rallied big time through to the end of the year. The tide is showing signs of turning. I was able to recommend profit taking on XNOM, TREN, and ZAPZ in June. NWKI staged a 50% rally this past week. I'm optimistic for rallies in several others; VTSI, BPTR, NWWV, and AGSI to be specific.

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.
 

Energy and Real Estate Bubbles Intact

I received requests for follow up commentary on the June 29th edition entitled Oil and Real Estate Bubbles; Due to Burst? In that edition I reviewed charts on both issues and hypothesized we could be setting up for the highly predictable "Double Repo" collapse of both indexes.

2005 has seen significant market capital flow into both sectors. At some point, that capital will flow back out and into the tech sector. I believe biotech will lead the way.

We might not have a total collapse of oil and real estate prices. While oil could be going to $110 per barrel in five years, I am convinced we are due to have a pullback in the price of light sweet crude. Nothing ever goes up in a straight line five fold. Oil is up 140% in the last 18 months. More importantly, everyone now expects $80 per barrel oil in the near term. The market has a history confounding a convinced majority. 

The housing market definitely has pockets of bubbles. New home buyers stretching for overpriced homes are getting zero down interest only loans. A 5.5% 10 year bond will blow many people out of their over leveraged real estate. Their payments could go up as much as 50%. 

I don't believe either of these are massively inflated bubbles, so letting a little air out won't cause a serious recession. I also don't know if these pullbacks will come in 10 days, 10 months, or 10 years. I'm just using a little common sense. 

Everyone believes real estate and oil will never go down, and the kind of convinced majority is usually proven wrong at some point.

Here's the current chart of the price of oil. The blue line is a 3x3 displaced moving average. The price broke down through that blue line at the end of June. Had it broken back above, made a lower high, and then broken below within 8 trading days, technicians would have been selling oil. 

Instead, the price went on to make a higher high. This rally is not over, and those holding energy stocks should hang in there. The dreaded "Double Repo" has been staved off for the time being, probably courtesy of Hurricane Dennis. 

The Dow Jones New Home Construction index tells exactly the same story. Broke below, broke back above, but then went on to make a higher high. This index is in no danger of an imminent collapse. 

I'll be watching for signs of capitulation in these charts over the summer. For the time being, the best thing to do is assume both energy and housing stocks will continue to trade well. 

However, keep this thought in the back of you mind. We are due for a rotation of capital out of these sectors and into others. When the time comes, I'll make sure you are informed.

If you find this commentary interested, please feel free to forward it to a friend.

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