To OTC Journal Members:
 

Santa Comes to Stocks- Updates on Ideas

The annual Santa Claus rally is well under way, coming right on cue as it does most years. Despite mixed economic data, fund managers are now buying the high beta names. 

If you don't understand why the market is rallying in the face of high oil prices, mediocre Holiday sales, and a falling dollar, let me explain it to you. It's all about hedge fund managers and their bonuses. There are roughly 9000 hedge funds now in existence. It is estimated there is approximately $1 trillion invested in actively managed hedge funds. It represents about 20% of the money in the market, but many estimate hedge funds represent about 80% of the daily trading volume.

Hedge fund managers work for performance based compensation. Most charge an annual management fee of 1% to 2%, which just pays the bills. It doesn't get the house in the Hamptons, three day vacations to Europe, or the kids' private school tuition. The big money comes from the 20% fund managers make of the profits generated from the "high water mark"- the high point of the previous year. If they fall below the high water mark, no year end bonus. That's why 10% of them shut down every year. Once they get behind, they don't have the patience to wait a year to get back above the previous high.

With oil and the dollar dropping (which makes oil and other imports even cheaper) and stocks rallying, hedge fund managers cannot afford to be out of the momentum stocks. They cannot underperform the market and make their income and keep their job. They have to be in and keep piling in. Once we turn the corner to 2005, things could change. 

Here's a quick pre Christmas review of most of the stocks I have suggested for trades for the annual Santa Claus rally.
 

Global E-Point (NASDAQ: GEPT)

GEPT was Monday night's idea (edition 116) for a year end trade. I suggested picking up the stock in the $2.50 to $2.75 range on Tuesday, but the stock did not cooperate. It opened Tuesday morning at about $3.25, and printed as high as $3.50 before coming back to a more moderate level. It was simply nuts. Personally, I would never buy a stock on a gap that big.

For those of you who were impatient and jumped in, I would hang in there for a couple of weeks and see what happens. I would set my stop loss at about $2.75 or whatever your risk tolerance is. 

For those with cooler heads who are interested in this idea, the stock is currently trading in the $2.80 to $2.90 range as I write this edition. Now would be a good time to take your position. The stock has given back about 50% of its move.

It's too early to identify any trends on the chart. However, Tuesday's action told me there are buyers on good news, and the stock can really move in big chunks. Look for new airline related contracts to create more days like Tuesday in this particular issue. We just need to be in ahead of those days.
 

M Systems (NASDAQ: FLSH)

FLSH is the Israeli based manufacturer of Flash Memory which is being adapted for many wireless applications. Both top and bottom line growth have been prolific in this company. 

This company is dramatically outperforming its peer in its group. The group as a whole has been under pressure as Flash memory is starting to become commoditized. Margins for 1200 lb gorilla Sandisk have been declining, and it has put a damper on the group.

I suggested this one for a Santa Claus rally trade in the October 9th edition at $14.80. The stock is having a nice breakout day and currently hanging in there at around $17. That's 18% in two months.

The stock is in a solid uptrend, and I plan to continue to hold the 2,000 shares in my trading account until the trend reverses. Note how well the trend line is holding up. There will be some pullbacks, but as long as the stock stays above the trend line I am going to hang in there.
 

Avanir Pharmaceuticals (AMEX: AVN)

AVN was another Santa Claus idea from the October 9th edition. The stock is currently trading at $3.36. $3 would have been your entry level on October 10th. 12% net so far.

This stock is another in an ongoing uptrend, and one I will continue to hold as long as the stock remains above its trend line. I'm looking for a request for an FDA Approval for Neurodex to send this one charging up the charts. Once they ask the FDA to approve the drug it will probably trade up. If they get the FDA Approval you will be buying a new car with your profits. If they get declined, be prepared to take a loss.

This stock is not participating in the current rally as well as some others, but the trend continues to be north until proven otherwise.
 

eResearch (NASDAQ: ERES)

This stock was taken out the to the woodshed and thrashed by the momentum players earlier this year. I tried to pick the bottom, but missed by a couple of weeks. Their September quarterly earnings report gave the hedgies another excuse to sell the stock, and there was one more gap down before the rebound began in earnest.

The entry level on this stock from October 9th was about $14.40. The stock has regained its legs, and is now trying to get through $15. I don't have this one in my trading account, but I wish I did. If it pulls back to the trend line and doesn't go below it, I might jump in.

As with those above, continue to ride this one as long as the trend continues. This stock is absurdly oversold at these levels, so it has a lot of upside.
 

Comments on Three Microcaps Featured Since August

• Torrent Energy (OTC BB: TREN)- This stock's charge up to $1.35 gave us a nice trade, but the stock is now trading below $1. Technically, it looks bad for the short term. If you aren't willing to hang in there for the long term and wait for results from their Coos Bay CBM natural gas development, just sell the stock. If you are longer term, the project looks very promising and has an outstanding management team. Investors stay in, traders get out.
• World Water (OTC BB: WWAT)- This company has marvelous and truly ground breaking technology in solar energy. The stock is a little underwater (no pun intended) since first featuring the company, but has been perking up recently. Worth holding onto as the technology is revolutionary and stock is behaving fairly well.
• Perfisans (OTC BB: PFNH)- This company's has a low cost chip for networking. They came out of R&D at the end of the summer, and announced their first purchase order. The stock gave us a nice trade opportunity in August, but has since turned around. They need more purchase orders to justify their market valuation, and they are simply not coming fast enough. I would sell this one if you still have it and put the funds elsewhere.

Go Here to view our compensation on every company we have ever covered, or visit the following web address:  http://www.otcjournal.com/disclaimer.html for our full profiles and http://www.otcjournal.com/trading-alerts/disclaimer.html for Trading Alerts.MarketByte LLC has been paid a fee of $30,000 cash by Global E-Point for coverage of the company. MarketByte LLC has been paid a fee of $30,000 by Torrent Energy for coverage of the company. MarketBtye LLC has been paid a fee of $30,000 and 75,000 warrants, convertible into restricted shares at $.25, by Trilogy Capital for coverage of World Water. MarketByte LLC has been paid a fee of $36,000 and 100,000 warrants, exercisable into restricted stock at $1 per share, for coverage of Perfisans by Trilogy Capital Partners.

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