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There are two new BLOGS for
you to review that were published since the last edition. First, those
with an interest in EFSF should review the current BLOG-
the stock pulled back to a perfect lower risk entry point. If you like
this idea, you should be taking advantage of this level. Secondly, I wrote
a review of the 10K year end filing which came out late Thursday. In short,
the company is now making $1.25 million per month, instead of the
$1
million per month it was making in Q3. I can think of a couple of things
not to love about this company, but none of them are in the numbers.
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.
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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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Mr. Toad's Wild
Ride- Where To From Here? |
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Ready to jump out the window with
all the hedge fund managers? After all, on Tuesday the NASDAQ and
DOW
each dropped about 3%. A huge an rare blow off. In fact, at one
point the DOW was down a full 500 points- an amazing, abrupt, and
bloody sell off. Those who are paying attention should have noticed most
of our microcaps had already corrected about 20%- most of the damage is
already done in my view- In those stocks.
What caused this abrupt and massive
sell off after seven months of market bliss? Glad you asked. Here's a list
the media trotted out:
-
The Shaghai Market tumbled 9% on rumors
the Chinese Government was going to impose capital gains taxes, triggering
a world wide equity sell off and flight to bonds (Shaghai was up 124% last
year).
-
Alan Greenspan said the US "might" be
headed for a recession (fyi: Greenspan's "irrational exuberance" speech
is one of his claims to fame- delivered as stocks rocketed up in the 90's.
Do you remember the year? - 1996- four years later and billions in profits
later he was right.
-
There is an alarming rate of default
in high risk, over leveraged mortgage borrowing (a very tiny percentage
of the mortgage market, and even smaller piece of GDP).
-
The NYSE had a technology "glitch" on
Tuesday afternoon which delayed trading activity and spooked institutional
traders- electronic orders were not being processed
Here's what I love about these kinds
of events. The financial press is so reactive it is really laughable. All
they care about is ratings, so here's how it works. The market tanks, and
they trot out every "expert" on the demise of the American Economy, the
global collapse, and the return to the gold standard. That's what you read,
hear, and see for several days. It's like the irresistible urge to slow
down for a wreck on the freeway.
So, what was this week's blow off
really all about? I'll tell you- it was about a long overdue correction
that just needed a good excuse to get started. In case you have noticed,
the market has been simply powering higher for seven months. It had gotten
a little squirrely of late, and hedge fund managers were just looking for
an excuse to sell. It's like musical chairs- the music stops and everyone
tries to sit down all at one time. It is estimated the 8,000 hedge funds
in existence now represent 80% of trades- and they are all trying to look
in the same profits at the same time before the month ends and they report
to their investors.
So, is Goldilocks (this beautiful
economy) ready to retire and collect social security? No- 8% corporate
profit growth, continuous new highs on S&P earnings, reasonable PEs,
stock buy backs, and globalization all say no. In fact, the bond market
is now pricing in a 40% chance of a rate cut in August. Oil prices are
a bit problematic, but $75 per barrel did not throw us into recession.
So where to from here? In short,
I think we have about another 140 points to lose on the NASDAQ Comp. Factoid:
Since 1991 the SPX has suffered 17 one day drops of 3% or more. That has
already happened, so the only useful information is what happened after
the big drop? On average the market has dropped another 3.9% over
the next 10 trading days.
This wacky and convoluted chart tells
me the NASDAQ Comp has a high probability of dropping into the 2225
range- that's 143 points below Friday's close of 2368.
The chart shows the confluence of
a number of "Fib Nodes"- Fib Nodes are areas where a number of Fibonacci
retracements all collide, suggesting a high probability the market is headed
there. This is pretty long term stuff- going back to 2005. This week's
collapse took us towards the 38.2% retracement of this major move, and
heads us to the 61.8% retracement.
I believe the NASDAQ Comp is headed
into the range you see circled on the left.
So, if we are headed to 2225- where
to from there? On the right is a very long term chart of the NASDAQ Comp,
measured on a month by month basis. As you can see, this chart goes back
to the big peak in yr 2000 at 5,000.
I believe we are now in the midst
of a long term recovery period for the NASDAQ which began in 2002. As you
can see, over a period of nearly four years we recouped .382% of the losses
from the top in 2000 to the bottom in 2002. The market was ready for a
much overdue breather, and the best possible way for it to happen is quickly
and rapidly.
So here's the bottom line in my opinion-
the NASDAQ Comp is going to drop somewhere into the 2225 range. At this
point, CNBC will trot out every bear with an argument about over leveraged
consumers, skyrocketing oil prices, budget deficits, international economic
crises, etc. That is when you know the market will have bottomed. From
there, we are going back to 3000+; it's that simple.
I am telling you, barring any cataclysmic
international geopolitical crises, this is not the same market we were
facing last May. Long term readers will recall I forecast the possibility
of a miserable summer in my May
21, 2006 edition entitled Don't Say You Weren't Warned. It's
a different environment. In fact, it is so different we might not have
the usual slow death in the microcap arena over the summer months. This
market blow off could be setting up for a reasonably strong summer.
So- are you a cool cat in the face
of extreme danger? Are you fearless in face of all the negative publicity
in the main stream media? Do you have the courage to jump on bargains when
no one wants them?
An experienced old Wall Street veteran
once pointed out to me that the stock market is the only place consumers
will not buy merchandise when it's on sale. Most consumers will only buy
merchandise when everyone wants it and the sellers are getting top dollar.
A final note- take the emotion out
of it. Snatch up bargains on the 61.8s, set your stop loss 10% lower, and
stick with your discipline. So far, CPNE at $2.20 and EFSF at
$.36 worked out pretty well. Get positioned for the next leg up. When's
it coming- when the COMP drops into the 2225 range- you tell me when that
will be. Two days or two months- I just don't know. The sooner the better.
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