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in the BLOG |
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I've posted several new BLOGS
in the past week for your review. Early in the week I posted some commentary
on the nice surge in EFSF on news of the double digit growth in
Cinnergen
sales.
You'll find thoughts on a good entry point for a pullback. Secondly, there
are some observations on schizophrenic under achiever CPNE, which
I believe is ripe for a big surge. Thirdly, some comments on TTGL
which got whacked earlier this week. The stock traded down to my SSL
and rebounded.
The BLOG is your opportunity
to ask questions and offer comments. I will make an effort to answer every
legitimate question. If I don't know the answer, I will contact the management
and get the answer. Alternatively, if you have questions you don't want
publicly displayed, you can always email me directly at editor@otcjournal.com.
To use the BLOG, simply go
to the home page at www.otcjournal.com
- the BLOG scrolls down from the upper right hand corner. The most
current journal entries appear on the right hand side of you screen. Check
back frequently for updates particularly when stocks are moving to overbought
or oversold levels in volatile markets.
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Microcap Malaise:
When Will it Change? |
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One loyal reader, Jeff K, asks for
a current explanation of the "State of the Micro Cap" market in
the BLOG last week. As I was thinking about that very subject, let's
address it this weekend. Always happy to oblige whenever possible.
The market is now having a long overdue
love affair with large caps stocks, and the small stocks seem to be all
but forgotten for the time being.
We enjoyed outstanding market conditions
for the small stocks from September to the end of January. In February
the inevitable correction arrived and most of the microcaps gave back 30%
to 40% of their breathtaking gains.
In April the larger stocks started
to power higher, and the talking heads on CNBC were absolutely giddy
reporting the DOW's move through 13,000, while the S&P
500 and the NASDAQ Comp made new 6 year highs. The market is
absolutely in love with large caps right now, and the micros have all but
fallen off the radar screen. We've already corrected, so we're not seeing
big sell offs, but volume has dried up to next to nothing, and stocks simply
are not moving.
Is the broader market really blasting
ahead of the microcaps? Instead of just surmising, let's look at the facts.
Here's a comparative chart I put together to give us hard evidence of what's
really happening. It features three micros that have done very well for
OTC
Journal members. I'm sure there are some examples of microcaps powering
higher right now, but I can't cover all 4,000 of them.
In green
you see a chart of EFSF. In blue you
see a chart of PNWIF. In yellow
you see CPNE. All big wins unless you are a really inept trader.
Over laid on those three OTC Journal microcaps is a chart of the
S&P
500 in red- the real measure of
the large cap market. The DOW is only symbolic.
All these stocks and the S&P
500 made big moves since the summer of '06. Just after we turn the corner
in '07, there is significant correction in all the charts. All four come
down quite significantly in February.
However, look what happens in March.
The S&P 500 powers to a new high, while the three microcaps extend
out sideways with some herky jerky action.
The premise proves out- for the time
being these three micros are dead on the screen vs the large cap stocks.
This phenomenon is known as "Divergence".
The S&P is breaking away, while the micros are just sitting there.
So- here's the main question and the theme of today's edition- what's causing
this and where to from here? All divergences eventually correct- do we
see the larger market collapse? Or do the micros perk up and start to chase
their grandfathers?
I believe there are several factors
fueling the "Micro Malaise" right now. First, the market is obsessed with
large cap stocks, simply taking the attention away from the smaller stocks.
The media loves a large cap rally.
Secondly, there is the seasonal factor.
Investors have memories, and last year anything you bought in May got hammered
in June and July. Of course, the Israelis and Hezbollah were lobbing rockets
back and forth over the Lebanese border, and oil spiked dramatically. Conditions
are different this year- while oil is still high, it is not spiking in
dramatic fashion. If it did, it would allow the Bears to get the media
focused on the "R" and "I" words (recession and inflation).
I believe (barring any international
geo-political crises) this year will be different. It is the market's job
to constantly confuse and confound us. If you're expecting a repeat of
last June and July, the market will probably confound you and move considerably
higher. Right now, we have inflation running at 2 1/2%, while GDP is running
at about 2%. We are getting close to the point where the FED can start
to lower interest rates and stimulate the economy. Lower interest rates
are good for stocks.
So, when will the micros come back
into favor? At this point in time, would you rather own the S&P 500?
- after all, the rally is getting a bit extended- it is a shaggy and scruffy
rally that could use a makeover. Conversely, would you rather load up on
your favorite microcaps? They have recently enjoyed a makeover; they are
clean cut, fresh from a trimming, and fundamentally looking quite good.
I realize one is high risk- the other
much lower risk, so you should be investing different kinds of capital.
However, this divergence will not continue forever. As the large cap rally
extends, the market will start looking at the smaller names which haven't
moved for a while.
We have lower volumes and extended
sideways trading. The longer it goes on, the bigger the moves will be when
they happen. Look for a rally to begin soon.
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