To OTC Journal Members: 
 

The Language of the Market

The market is starting to line up just as I suspected it would, and in order to understand the subtleties of the market, you need to understand the semantics of the market as well. The market has its own code language, and the sooner you understand the hidden meanings, the sooner you will understand the kind of environment you are in.

Let me give you two examples of semantics, or code language. Suppose your wife said "We Have To Talk". Translation: You're in big trouble. You're probably not sure what for, but you're going to find out. If you were to ask your wife "Can I go play golf", and she responded "Do What You Want", here's your translation: "You Will Pay For This Later". Those are just two tongue-in-cheek examples of true meanings.

The stock market has its own set of semantics. Here's some examples from the world of analysts. If an analyst rates a stock a "hold", it means "sell". A "Buy" recommendation means "moderately interesting, but there's other stocks to buy right now". A "Strong Buy" recommendation means it's actually time to buy it- in the analyst's view.

If you hear the following codes words in stock market lingo, here's what they really mean. When you hear "Stocks Are Volatile", it really means stocks are going down. If you hear stocks are "Range Bound", it means stocks are going no place on very light volume- which describes today's environment perfectly.

In fact, if you look back at the June editions, you will note this is exactly what I predicted would happen. I said as we moved into Q2 earnings releases the market would stop selling off as it turned its attention away from the Global picture and the obsession with a European melt down, and start to look at corporate performance again.

May and June were the "volatile" months where the market went straight down. July has evolved into the "Range Bound" month where stocks have stopped selling off and gone into a proverbial coma, and now we need to get back to a "Worried Market", where stocks keep going up in the face of all sorts of macro distractions.

If fact, if you really look closely, the market is showing signs of a change of character. It's difficult to detect, but it's there. In a Bull Market, there's always a pattern of higher lows and higher highs. For example, look at this chart of the Russell 2000, the broadest index of small stocks. 

Note the recent change of character as the lows are getting higher, and the last two highs are getting higher. The first green line is the July low. It was followed by a rebound, which was followed by a higher low, which was followed by a higher hi. 

It's been heading down the last four days, but when it heads back up, if it makes a higher high, the market pundits will really start to pay attention. The larger indexes all look pretty much the same way. In fact, the venerable DOW was up 7% in July.

I expect we will complete the process of turning back up in August. It took us 2 months to finish being "volatile" It will likely take us 2 months to finish being "range bound", and then we can start really climbing a "Wall of Worry" once again. This market, at present, as following the exact script I laid out in June. If this series of higher lows and higher highs continues, each high will have a little more momentum and a little more volume.

As far as my personal favorite sector goes- the small cap China stocks, it's going to get really interesting in Mid August. Thanks to the slight delay in reviews and translations, the China companies don't file their numbers until fairly close to the deadlines. In the case of Q2, the deadline is around August 15th, and it can be extended a week without penalty if necessary.

I'll be traveling from the 3rd to the 8th. Upon my return, I expect to be busy look at 10Qs- the quarterly reports. About the 15th I will be slammed, but I'll try to get reviews out as quickly as possible. No doubt, there will be some surprises both to the positive and negative. However, out of the China small cap sector, I'm looking for a very positive tone.

Just because the China stocks are dead right now, doesn't mean the world doesn't still believe in the China phenomenon. The latest statistics show that the foreign direct investment (FDI) that flowed into China in June surged 39.6% from a year earlier to $12.51 billion, resulting in a 19.6% year-on-year increase to $51.43 billion during the first half of this year. The world's big money knows this is where it will find growth, and money is pouring in at a record pace. This capital is the fuel that will keep the growth engine running.

The Q2 earnings might get these stocks started up again, but over the course of the remainder of the year, sooner or later these stocks are going to get hot.
 

The NF Energy (OTC BB: NFEC) Sneak Attack

NF Energy, one of my favorite sleepers and a past money maker for OTC Journal subscribers, was out with news earlier this week. While the market yawned and didn't quite get the significance of the event, those of us who follow the company rather intimately were taken aback and very favorably impressed.

I picked this stock out in June of '09- about 13 months ago- at $2.09 (split adjusted). The stock made a high of $6 within four months, but has since been drifting down along with the rest of China sector. I'm still a big believer and really sold on the company's future as an "energy management" story. I also believe NFEC will deliver some very impressive numbers for the remainder of 2010 after a rather anemic Q1 in 2010.

I personally bought the stock in June of '09, sold a bunch of it for a very strong return, but have recently accumulated nearly 25,000 shares in the open market since we started tanking in May and June. I own the majority of those shares between $3.50 and $4, so I'm still a bit underwater at the $2.50 mark.

The company has a number of major energy saving projects in their hopper, and I knew they needed capital to fund the fulfillment side of these revenues producers and complete the build out of a new manufacturing facility. 

China companies that have raised equity capital in the current anemic market have gotten crushed (see RINO, UTA).The market hated the dilution. NFEC needed money, and got it with no dilution. NFEC established a $5 million credit line at a bank, and will now be able to fulfill their upside potential over at least the remainder of this year and well into next. The debt can be taken with the conditions to raise capital with equity improve.

Watch for this one to really catch fire and perk up later in the year as liquidity improves. Buyers will move this stock up very quickly, and the mid August Q2 numbers could prove to be the catalyst. Watch for this comatose stock to wake up in a big way when a little buy side volume re materializes.

I'm looking for about $30 million in revenues this year, and about $.50 in EPS- about $6.3 million net. Since the company achieved about $20 million last year, a 50% top line increase is likely in the cards. If I'm right, at a 10 PE multiple, you are looking at a lay down double from the current $2.50 per share price.

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