Small Cap Network Blog

I was hoping for a little more of a retest yesterday. The major indices spent a fair amount of time in the red, but didn’t sink all that deep - only a pullback of about 1.3% at the lowest point of the day. By the close, the loss had been cut to less than 0.5%.

So why am I complaining? That dip didn’t retest (touch) the 20 day moving average line or the 50 day moving average line. Worse things have happened, but we still don’t yet know how the bulls are going to respond when really - and I mean really - pressured. So, it’s a task that I think still has to happen sometime.

As of right now though, it doesn’t look like it’s on tap for today - the futures are well up this morning (about 1.0%, depending on the index). The bullish effort isn’t likely to stay that strong for good, as we’ve seen recently that the morning futures are exaggerated at best, and downright pointed in the wrong direction at worst…sometimes. Perhaps today will be an exception, and the strong pre-market activity will carry through the entire session. I have my doubts though. I’ll let you know for sure at the end of the day.

In any case, a couple of bright spots…

I’ve been waiting for the S&P 500 to make that all-important close above 918, which it did on Friday as well as Monday (even with Monday’s slight selloff). And second, Obama’s tax cut plan appears to have teeth. It may take months or even years before any effects of it are actually felt, but it’s inspiring a little confidence in the meantime.

Any downsides?

Yeah - Obama’s tax cut plan may take months or even years before any effects of it are actually felt. It’s not apt to keep the market inspired long enough to prop stocks up all the way into the second half of the year. We’ll need some other motivation in the meantime.

As far as today goes, it looks like the early strength is stemming from retailer and automaker raliies in Europe. Let’s see if today’s ISM numbers for December - or the Commerce Department’s November factory orders - hurt or help the effort; they’re both due this morning. The National Association of Realtors’ November pending home sales report is also scheduled to be released this morning. It should be ugly, but how ugly is the question.

The Fed’s also going to release the official minutes from their last meeting later today…. the meeting where they cut rates to 0.25%. It should be a non-event, but maybe there’s a nugget in there we didn’t know about yet.

By the way, I’ve noticed something lately… a lot of perma-bears seem to be coming out of the woodwork now, warning us that things are going to get worse, and that the current strength is just a sucker’s rally. Or, maybe it’s just that the media is more interested in giving them an audience and less interested in talking to the bullish commentators. I’ll just say this about that recent trend - don’t assume they know any more than anybody else. My advice is the same as (and I cringe to say this) Jim Cramer’s advice….. don’t listen to the gurus - listen to the market.

But isn’t Jim Cramer a ‘guru’ too? Yes, he is, and he’s a bit of a goof in the grand scheme of things. However, I think he’s absolutely right about focusing on what the market’s doing instead of what all the pundits are saying it’s going to do.

As far as what it’s ‘doing’ goes, though I still have my doubts about everything, the indices are above their 20 and 50 day lines for the first time in months. The 20 day averages are above the 50 day averages in months. The VIX is just above multi-month lows. Maybe the market is going to climb this wall of worry.

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Though the new year technically started on Friday, squeezing a trading day in after a holiday and before a weekend doesn’t quite help us out if we were looking for early clues about sector leadership. As fas as I’m concerned, today’s the first real day of trading in 2009. So, the clues from today’s activity mean a whole lot more to me.

In any case, if there are any clues we should take at face value from today’s small cap leaders, then here’s the list you’ve been waiting for…. the best-of-the best industries from the world of small cap stocks.

Some of these arenas I’m not surprised to see get a good start right out of the gate. Others I’m not so sure about. Take a look for yourself, but keep reading for my follow-up thoughts.

        Name                                  %Chg: 1 day      %Chg: 4 wk      3-Mon Pct Chg

1. Oil & Gas Drilling                           8.19%             27.19%              -28.12%
2. Automobiles Industry                    6.31%             17.75%              -10.97%
3. Marine Industry                            5.99%             26.38%              -12.33%
4. Oil & Gas Explore & Prod               5.61%             26.39%              -24.20%
5. Homebuilding                               5.36%             -1.64%              -23.23%
6. Diversified Financial Srvcs Ind        4.30%             5.23%                -1.14%
7. Energy Equip & Service Industry    4.61%             24.41%              -16.50%
8. Energy Sector                              4.45%             24.59%              -16.37%
9. Oil, Gas & Consumable Fuels Ind    4.20%             24.84%              -16.99%
10. Oil & Gas Equip & Svcs                  4.00%             23.92%              -13.93%
11. Computer Hardware                      3.57%             12.15%              -15.42%
12. Cstr&Frm Mchnry & Hvy Tks          3.52%             17.43%               0.26%

Energy doesn’t shock me one bit. I predicted a modest recovery in oil prices with my predictions for the new year, which would pull the energy sector’s stocks along for the ride. I trust that strength, even if I still expect a lot of back-and-forth.

Automobiles doesn’t entirely shock me either. The ‘worst is over’ mentality prevails thanks to a government bailout. Fundamentally speaking though, the worst is not yet over. However, America’s love of turn-around stories may be enough to prop those stocks up for a while. A trade? Maybe. An investment? Not yet.

Homebuilding? Same as automobiles…..America loves a turn-around story more than they love results. I do think housing is at or near a bottom. It may take much longer for investors to see that we just don’t need as many houses or homebuilders as we currently have.

Financial stocks really are poised for a better 2009, though it’s still apt to be hit and miss from one stock to the next. I trust the early strength though.
As for computer hardware, I don’t see much longevity to today’s strength at all. Homebuilders and auto-makers can ride the euphoria train for a while. Hardware makers, on the other hand, have too much inventory, and not enough customers. Even if the economy turns considerably better, slightly-more-advanced technology is low on the list of priorities right now.

Farm machinery and trucks? Yeah, I can see that trend lasting a while. I predicted agricultural stocks would remain hot in 2009, which means ag equipment could as well.

Anyway, it’s just one day - not to be etched in stone. I just thought it was kind of interesting to see which small cap industries jumped on the first day of real trading. As I said on Friday though, January is an erratic month, full of ups and downs. The list above could change dramatically when I do my “monthly small cap leaders” list at the end of January.

If you’ve got any special insight about individual small cap companies that are driving the results above, please chime in below.

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For several weeks now we’ve been using the so-called ‘TED Spread’ as a measure of how healthy (or unhealthy) the credit market has been. Since the TED Spread indicates the perceived difference between the safety of lending to other banks versus the safety of lending to the government (which is basically considered risk-free), the TED spread is a decent indication of how likely or unlikely a bank is to make a loan to another bank…. which is how most banks get the money they lend out. [Lending out your own money is so passé. Putting someone else’s money on the table is the wiser choice in the new economy.]

That’s a rough, thumbnail sketch of the TED Spread. If you want the full-blown explanation, click here to revisit the October 8th edition.

Well, not that we’re putting the TED Spread on the shelf for good, but we now want to shift our attention to another measure of credit liquidity… how much cash is actually available for borrowing? Lower risk is great, but if the money’s not available to lend out, then it’s just not available. Thus, lending can’t fully thaw out.

To figure out just how much cash liquidity there is out there (i.e. cash available for lending), we can use the 3-month LIBOR-OIS Spread.

The what? The ‘LIBOR’ definition is still the same… the London InterBank Offered Rate, which is the interest rate charged for short-term interbank loans all banks need from time to time to meet short-term liquidity requirements. The ‘OIS’ is the Overnight Index Swap rate.

The difference between those two rates is the perceived (though generally accurate) availability of funds available for short-term loans. In this case, the spread would indicate the availability of funds for three-month loans, though that kind of available cash for lending would benefit all sorts of loan time frames.

Anyway, the higher the LIBOR-OIS Spread, the less money there is for lending.

Almost needless to say, the spread went sky high in September, peaking at 3.64 in early October. That was the highest reading I could find since the spread’s been tracked. (Let me know if you can find verifiable instances of a higher LIBOR-OIS Spread.) Of course, you don’t need me to tell you that there was just no lending money available to pretty much anyone in October - a problem that persisted through the better part of December as the spread was coming down.

Anyway, here’s the good news… it looks like TARP’s intended liquidity injection may finally be making a dent. Or, maybe it wasn’t TARP but just time that helped. Either way, the LIBOR-OIS Spread is now back to 1.24, which is the lowest (healthiest) reading since September.

That’s still not as strong as the sub-1.0 readings that were the norm prior to September, but I don’t think we’ll see those levels again, ever. Lending policies, as we know now, were just way too loose then. I suspect the LIBOR-OIS Spread will still sink a little from here, but 1.24 isn’t bad at all.

Here’s a chart… a pretty stunning visual.

Like I said above, the TED Spread still has a role going forward… it’s just not a complete picture. I think we’ll start looking at both in tandem as we study the credit market’s in the future. In the meantime, this is great ‘bigger picture’ news for the economy. It’s not a fix-all, but it’s a start.

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After five days of a mostly-bearish drift towards the lower side of a narrow trading range, the S&P 500 bounced up, fairly firmly, to highs not seen since the 19th. It was the best close since the 17th. Not bad. Not great, but not bad. My only beef stemming from the analysis is that - once again - the 50 day moving average line (purple) is acting as resistance. And bigger picture, my line in the sand at 918 still hasn’t been crossed. So, I guess I’m not overly-excited for two technical reasons.

The VIX closed lower, though no lower than the bottom edge of its near-term range. That’s still more on the bullish side of the fence though… just very weakly. It’s probably more a sign of volatility being reigned in than a directional clue for the market.

The futures are barely in the black as I write this. However, I suspect today will be an very uneventful day, and more apt to be slightly on the bearish side as traders wrap up any selling for calendar for 2008. There’s no particular advantage in buying in calendar 2008, so any significant pressure should come from the last minute sellers. Even then, it should be barely perceptible, as most traders are not working….volume should be oddly light.

My advice for investors is to do the same - take care of whatever trading/investing business you need to as soon as you can, and enjoy some time off after you’re done. I’ll be working, but that’s my problem.
I may add another blog entry later today, but if I don’t get to, have a great and safe New Years event (whatever that may be for you).

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The first batch of feedback from yesterday’s ‘Top Ten Market Predictions for 2009′ has arrived. Since everything in it, and all the responses to it, are going to be broad, I’m going to post them here in the blog. As more roll in, I’ll add them in other blog entries.

Here’s the first one.

Interesting predictions but I am not fully persuaded. First, I am much more bearish. I do agree that the Glass-Steagall Act separating investment banking and commercial banking will not be restored in 2009. More likely investment banking will go the way of the Dodo bird. But I don’t see the Titans taking the Superbowl this time.

Editor’s response: Interesting. Who do you think might be doing investment banking going forward? I ask because someone has to do it….maybe. You make an interesting point though - how much investment banking do we need, and what will it look like in the future? They (all the IBs) seem to be disintegrating. I don’t think it will go away though. If not the Titans, who do you like?

Next up…

If you think Linux is worthy, look at Leopard. a fantastic OS!

Editor’s response: Thanks. I’ve never heard of Leopard, but I’ll check it out.

And finally, we got this e-mail, which touched on several topics.

Thanks for all the neat predictions. I had put off going from XP Pro SP2 as long as could. Probably still be with XP Pro if I’d guessed how bad Vista was to be. In the end tho with the Vista SP2 beta release things have been more stable. Any probs that do arise are generally from the occasional rogue program I try like an old chess game I might find from some years back. Running Vista’s disk check during the reboot required for that does return things to normal. Things that usually go wrong on a rogue s/w are loss of sounds and presence of DVD. But as mentioned that clears up. Someone else also mentioned Windows 7.0 is just more bloar for now as with IE 8 beta. Oh, also heard some others on TV liking Slumdog Millionaire. Couple clips I’ve seen were so so. Prob have to be there. Ben Button tho got some glowing recos. But then it took me forever to finally see In Bruges and Casino Royale. All the best for a better New Year. Doubt can be more shaky since now we know what can really go bad.

Editor’s response: Thanks for the note. In order….

1. I understood about half of what you said regarding Vista’s functionality. I’ll get my computer-guru friend to translate the rest. I’d really like to get away from Vista, but can’t find all the drivers I need.
2. Yeah, if the chatter is correct, Buttons gets the nod, but Slumdog will be a contender. It seems like the Oscars are always a surprise though.
3. Agreed; it may not be any better in 2009, but it sure can’t get any worse than 2008.

If you’ve got any feedback, you can add it below.

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If my math is right, after Monday, 11 of the last 15 Mondays have been bearish. So, I’m not too rattled by yesterday’s selloff… it’s par for the course. My concern is rooted in something much deeper than that. Remember the 50 day moving average line (purple) we started to toy with on the 16th? We still haven’t broken past it. Usually - though not always - those breakout moves happen pretty quickly and decisively. I don’t like the way this one is lingering…. I don’t get a warm fuzzy for the bulls.

Likewise for the VIX - after reaching new multi-week lows last week, it’s just been moving sideways (though the market has too).

If I were totally objective I’d point out how the last four days were nothing but a consolidation phase, and I wouldn’t be an optimist or a pessimist. I’ve been trained to be skeptical though, which has been the most productive/profitable mindset since October.

The good part about a consolidation phase is that whichever way the index ends up moving out of the tight range, it should stay pointed in that direction for a while. We might be able to squeeze a trade out of it.

Futures are up this morning, though they were up yesterday morning too when the Gaza/Isreal situation was less troubling. Either the conflict there wasn’t the real reason for the selloff on Monday, or someone is trying to push the futures higher so they can sell a bigger position into that early strength.

It just makes me want to reiterate something… the only price that matters is the closing price, which lately has only been determined in the last hour of trading. I wouldn’t worry about the futures or the opening price much, if any at all.

I’ll update this chart at the end of the day.

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Looks like the tepid buying mood we witnessed in Friday’s lethargic session has carried through to this morning - index futures are up slightly. So is oil though, thanks to some geopolitical turbulence in Gaza. It’s nothing unusual though, so I don’t see oil prices staying pressured for too long. Either way, trading should remain thin - even if modestly bullish - this week, as most traders are taking the week off to celebrate Christmas and New Years.

Just to catch everyone up, we’ve been semi-optimistic about the apparent change in the market’s overall direction. The S&P 500 broke out of a bearish rut in early December, and started to make higher lows. That’s good, though we haven’t actually seen the SPX make higher highs yet. In fact, the index closed under the 20 day moving average line (green) on Friday… a pretty clear indication to me that things aren’t en fuego.

The line in the sand is still 918, which the S&P 500 has brushed several times in the last few weeks, but has thus far been unable to hurdle. If we get above that line, then I’ll be very excited. Take a look.

Now, as far as oil goes, it’s been a while since we looked at a chart. I’ll correct that today.

The daily chart is pretty much meaningless anymore, since the pullback has been so huge, and so prolonged. I’ll show it to you anyway just to make that point.

So, we have to focus on crude’s weekly chart to get any kind of reasonable bearing on what may be next for oil. Take a look at this chart and see if you spot what immediately caught my eye.

Yep, last week, oil futures matched - but didn’t fall under - the lows seen in late 2001 and early 2002. I don’t think it’s unreasonable to assume support’s going to be made there. My key clue is the fact that oil’s trading well off those lows today. However, being waaaayyyyy oversold is a decent argument too.

How far might any bounce take us? I’d look to the $59-ish area; it’s been support as well as resistance in recent months. That’s just a rough guess though. We’ll pinpoint a target for oil when/if the need arises.

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Not that they’ve done anything right before this, but the Fed’s decision to lower interest rates last week - to unprecedented low levels - has indeed fostered a little more willingness to lend. It’s still not great, but it’s better than it was.

My basis for the assessment lies in the TED spread… the measure of risk banks perceive they’re taking on by lending to other banks. The TED spread is as low as it’s been in months, after peaking at record-breaking levels in October when the credit market was frozen solid.

(What exactly is the TED spread, and why does it matter? We explained it on full detail in early October. Click here to review that explanation.)

As of right now, the TED spread’s reading is 1.44. For perspective, that’s almost back to the 1.1 level we saw before the lending market fell apart, and it’s well under the October peak of 4.63. In other words, the credit market is almost on its feet again, as banks aren’t terrified to lend to other banks. (Nobody actually lends their own money… they borrow money form other banks to lend to their own customers.)

Just for the record, I think when/if the TED spread gets back to 1.1 - though it wouldn’t surprise me if it didn’t though - I don’t think the lending market will actually be the same “no holds barred/no questions asked” kind of industry.

Even people with great credit are struggling to get loans now, so the standards will be much healthier going forward. That’s a good thing though - the interest rates will now actually reflect the true risk, whereas they didn’t before. We all have to jump through a few more hoops to get the rates we deserve, but it’s better than going back to the way things were (which caused the mess in the first place).

I digress though…. my point was just to let you know that the lending market is getting healthy again. Here’s the chart.

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Though the market was in the red yesterday - again - not every industry was giving up ground…. particularly among small caps. The S&P Small Cap Distributor Index was up nicely (4.7%) on Monday, as it has been for the last four weeks. Were it just Monday we were seeing this strength, I might dismiss it as a mere curiosity. But to see this oddball group perform that consistently in this environment? I think it’s worth a closer look, just to see of there’s something worth adding to our portfolio.

First of all, a ‘distributor’ in this sense is a technology and electronics distributor… mostly. The actual definition is a little blurry, but the group includes the likes of Tech Data (TECD), Ingram-Micro (IM), ScanSource (SCSC), and GTSI Corp. (GTSI). (Be sure not to confuse these stocks with food and beverage distributors.)

However, it’s specifically the small caps in this group that have been on a month-long tear.

As for Monday’s pop from the small cap distributors, it’s attributable to two - and only two - names….Peerless Systems (PRLS), and Pomeroy IT Solutions (PMRY). They were up 3.7% and 2.4%, respectively. Impressive numbers, though the fact that they’re both priced under $5.00 means a small gain goes a long way in percentage terms. Still…

Both are ‘of interest’. I’d lump these two smaller names into a more speculative category, while based on the intermediate-term strength, I’d be willing to take a look at a couple of the larger names mentioned above as a less-speculative possibility.

It’s not just the chart I’m digging though. The underlying results for these companies are compelling too. I don’t have time to get all the way into the rationale, so I’ll summarize it with a “now and later” look at their price multiples (a.k.a. P/E ratios). You’ll find that data in the nearby table.

My first thought was that the ‘N/A’ was a nice way of saying nobody expected profitability from that respective company. As it turns out though, ‘NA’ actually meant ‘not available’ in this particular instance. These companies are small enough - and boring enough - to avoid analyst coverage. However, I know for a fact that GTSI and Pomeroy were both profitable last quarter, though they had not been profitable at some point earlier in the year (i.e. they’re not imploding).
Now, do I believe even the adjusted projected-P/Es? I don’t distrust the genuineness of the guess, though I don’t take it to heart either. I think there’s still an overly-optimistic bias from these companies as well as from the few analysts following these companies.

At the same time though, I do firmly feel that at least a couple of these names will be surprising leaders in 2009. I believe the worst of any recession has already been priced in, and I suspect we’re at the beginning of an economic upswing. As the global economy starts to improve, I think many of the individual company results will be no worse than meeting expectations, and possibly exceeding them.

What I like best, however, is that nobody else is even interested in these names….analysts, or investors. It’s still hit-and-miss within the group, but I like the overall group quite a bit because the bulk of the outside world hasn’t meddled with them yet.

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At 3:25 PM EST all hope seemed lost…. the S&P 500 was under water by 3.2%. Within 35 minutes, things didn’t seem nearly as bad - the S&P 500 only closed 1.8% below Friday’s close. It’s still a loss, but one that leaves the bulls with reasonable hope. Indeed, the strongest volume of the day came with the rally in the last 30 minutes of trading. The bulls are resilient, even if a little flighty.

Anyway, I promised a chart update, so here it is.

Even with the last-minute (well, last-hour) rebound though, we still saw the market close below its 20 day average. Not good. As I mentioned yesterday, however, volume is going to be light this week, and will get lighter as time passes. So, this is not a majority opinion….. it’s just a frustrating drift. (Still, how things take shape this week sets up how they do next week.)
As for the VIX, you can’t deny it looks like it’s pushing off that lower Bollinger band line. That’s strike two.

The futures are on the plus side of the  board this morning, though that may not mean much - if anything - regarding how we’ll end the day.

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Just for the record, 10 of the previous 14 Mondays have been bearish, so don’t get too worked up about this one. Considering how far we’ve come since this point in time last month, the bulls deserve a break. My only worry is the one I gave on Thursday… that the recent retest of the 50 day moving average line was just going to end up being a set-up for a knock-down. The S&P 500 is back under its 20 day moving average line today; that line needed to hold up as support if the bulls were going to stay decisively in the hunt. So, today’s a bit of a wrinkle.

The day isn’t over yet though. In fact, I’m inclined to give the market through the end of tomorrow before I close the book on any potential rally.

That said, I’ll also point out that the VIX is indeed finding support at its lower Bollinger band (20 day)… a known reversal point. That doesn’t exactly encourage.

Check back at the end of the day for an update on this chart. Everything could change - radically - in the last hour.

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As George Castanza would say about the Bernie Madoff fiasco, “This thing is like an onion - the more layers you peel, the more it stinks!” We got another round of news regarding the scandal this past week, and it stinks even more than it did.
I’m not going to rehash that here though… I’m more interested in some of the remarks about the latest batch of investigations. Some of them are funny, even if they don’t mean to be.

Here are a couple of my favorites….

Felix Salmon of Conde Nast’s Portfolio.com stated about the resulting confidence crisis…

“if you’re an investor, yes, you should be worried about losing your money to fraud — but you should also be even more worried about losing it the old-fashioned way, by investing it with a hedge fund manager who blows up spectacularly.”

Comparing the SEC’s complete failure to a Keystone Cops shtick, Greg Newton rebutted:

“characterizing the SEC as The Keystone Cops does defamatory disservice to The Keystone Cops’ investigative skills.”

Those were the only two I found that were appropriately bitter but also funny. As more of these jaded quips arise though, I’ll be sure to post them here.

Anybody else have one I missed? Leave ‘em below.

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Do you wanna’ know where the market is going to close today? I‘ve got a pretty good guess….either it will be spot on, or way off (how’s that for non-definitive). Frankly, I hope the guess is way off, because reaching the ’spot on’ target would be a sharp move lower. More on that in a second. What I wanted to do first was update my chart of, and thoughts on, yesterday morning’s look at the S&P 500 and the VIX.

Below is the exact same chart I gave you before, only updated with yesterday’s closing prices. Two problems immediately come to mind. The first is, the S&P 500 slid back under its 50 day moving average line. The second is, the VIX appears to have found support at its lower Bollinger band line. Both suggest the rally is winding down. All hope is not lost quite yet though.

It could take a few days for the market to get comfortable with the idea of a recovery. As such, we might see several ‘retests’ of the recent upward thrust. That’s a good thing. As long as we can hold our ground, and the down days come on lower volume than the good days, we’ve still got a better-than-average shot at emerging on the bullish side of the fence. Take a look at the chart, but then keep reading for the less-optimistic reality.

Ever heard of the ‘max pain’ theory? As far as the market is concerned, it’s the somewhat-cynical (though not entirely untrue) idea that the market has a way of providing the maximum amount of pain - losses - for the majority of investors.

The options market has a way of showing you a potential ‘max pain’ effect by indicating at which particular strike price most calls and puts are owned. Wherever the market can close and cause most options to expire worthless, well, that’s likely where the market will close on expiration day… which is today.

There’s something of a quirk with the idea though…..it’s either dead-on, or waaayyy off. There’s no in-between. That ‘way off’ result still provides some pretty decisive pain, but only for most of the call owners, or most of the put owners. Point being, this isn’t the kind of thing you want to bet on too early… sometimes the outcome we’re headed towards doesn’t become clear until the last day of expiration week.

Anyway, right now most of the owned calls are at 850, while most of the puts are owned at the 825 and 875 strike…right between 850. The most pain would be created by a close somewhere below 850 (where all those calls would be worthless) and above 825 (where at least the 825 puts would be worthless). A close under 875 would still be profitable for owners of the 875 puts though.

Here’s the SPX option open interest grid from CBOE.com. Take a look, but then keep reading for the alternative possibility.

The second scenario is a close above 875. That would make all the puts - both the 825 and the 875 strike - worthless, though it would reward all those folks who own the 850 calls. Normally the odds of this outcome would be a distant second. However, there’s obviously a lot more open interest with the puts than with the calls here… so the ‘max pain’ could actually come with a bullish close. I prefer that scenario, but I’m not getting married to any guess.

The good news is, the futures are well up this morning, and we sold off sharply yesterday. That sets up a strong possibility for the second (bullish) outcome today. As always though, be diligent and keep an eye on this erratic market.

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If the last several weeks hadn’t taught me to be so jaded and skeptical of any rally, I’d probably be very excited to see the S&P 500 on the verge of breaking above a significant resistance level. As it stands though, I’m not going to fully believe it until I see it. When the S&P 500 moves past that ceiling of 918, then I’ll get excited. The VIX, on the other hand, is doing a much better job of convincing me to be bullish.

The chart below says it all. There’s resistance at 918, where the market has topped-out or stalled too many times lately. But look at the VIX. The volatility index has already fallen under a short-term support line (dashed), and is close to moving to new multi-week lows.

My only concern right now with the VIX is that it’s just now running into its lower Bollinger band, which we know is a potential reversal spot. This time, however, there’s a little more momentum behind its pullback - it may be able to keep driving the lower band line even lower.

Notice the S&P 500 hasn’t yet tested its upper Bollinger band; I’m not sure what’s going to happen when/if it reaches it. Based on what I see so far though, I’m inclined to think the SPX will keep driving higher. The key is getting past 918.

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It may have only been a technical/legal hurdle to get over, but it’s still one that bulletin board company Voyant International (VOYT) is glad to have in writing rather than just in spirit. Harris Corporation - the creators and owners of the software that will make Voyant’s aviation broadband offer work - has officially inked a licensing deal with Voyant. Prior to the contract being finalized, there was only a letter of intent between the two companies.

I had little doubt it would happen, but now that it has we can all sleep a little easier.

As for what Harris “software-defined radio technology” actually does, well, you’ve got me… the connection technology is very advanced, and not really comparable to land-based broadband (nor even comparable to wireless connectivity commonly known as wi-fi). Aviation Broadband’s offer is truly high-speed broadband, delivering a fast digital connection through the air. Of course, the big difference is that the point of connection is always moving, and each connected device still needs to be handled by a router/modem-like device that can handle the geographical movement. Maybe that’s what Harris’ software does. Or, maybe what Harris is providing is the know-how for the entire technology, from start to finish. It doesn’t really matter - it’s a done deal.

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When’s the last time you saw a bulletin board stock get featured on CNN? I’m sure it’s happened before, though I can’t remember when. More important to us though was the stock in question…. it was our very own China Energy Recovery (OTCBB: CGYV). The company was the focal point for a two-minute clip regarding potential clean energy initiatives here in the United States. Roger Ballentine, a former Clinton advisor and a current member of China Energy’s board, was representing the company.

If you missed the original airing, don’t worry - there’s a clip available here on the CNN website. A short advertisement plays first, then the fearture starts up.

There was nothing particularly new in the clip for us; the point here is how this two minutes was a very important two minutes for the stock. CNN has an audience most companies can only dream about. Tell a good story to a large, profit-hungry audience, and the result is lots of focused eyes and ears. That’s what’s behind today’s 10% pop, though I think more will trickle in over the next few days.

The best part about publicity, however, is how it garners more publicity. I wouldn’t be shocked to see China Energy featured somewhere similar in the near future, once again in a forum usually reserved for the biggest of the big companies.

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The bulls may not perfectly hold the ground they took back yesterday, but at least they advanced into it. It’s an attempt they couldn’t have even made a few weeks ago. And, even today’s early retreat isn’t a permanent situation. I, for one, am excited about this shift in momentum.

What exactly am I looking at? For the S&P 500 (and all the other indices), it was yesterday’s cross above the 50 day moving average line. We haven’t been above that line since early September. I’m also looking at the CBOE Volatility Index (VIX), which has been under its 50 day line for several days (that’s bullish), but yesterday moved under what had become a relatively significant support line.

Of course - and par for the course - the futures are deep in the red today. I guess the Fed can only buy so much of a rally despite a rate cut that takes lending costs to unprecedented levels. I’m not surprised - the one thing that’s been such a pain for this market over the last several weeks is a stark inability to string two decent days together, back to back. That entirely stems from a lack of moderate pacing… it’s nearly impossible to rally 5% in a day and not invite profit-taking the next day. Hence, we’re headed for a lower open, at least according to the futures.

Even then (and as you’re probably tired of hearing by now), the only price that means anything is the closing price, which has only been decided in the last hour of trading for the majority of the last several sessions. So, don’t worry too much about the bearish pre-market pressure. You can check in around 3:00 PM EST and catch all the important action.

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Government bonds were never the sexiest of investments, designed more to provide safety and assurance than to offer growth. Now, they don’t even accomplish their primary goal. Indeed, they may not even accomplish their goal of reliable returns. One has to wonder if lending to the government is riskier than investing in publicly-traded stocks.

As it stands right now, the yield on 10-year Treasuries is a whopping 2.4% (annualized). What’s so stunning is that folks are still buying them – there’s a moderately active market. Why? Great question. The only possible answers I can come up with are habit, a lack of understanding, or insanity.

A couple of different times I’ve heard the argument “Well, at the very least they’ll fight inflation.”

No they won’t – that’s the point.

If you buy $100,000 worth of 10-year bonds, your annual interest payment will be $2400. You’ll get $100,000 back a decade from now, and you’ll have collected $24K of tax-free income in the meantime. Unless we enter a period of deflation, and stay in it for 10 years, odds are you’re going to lose ground to inflation.

My sensitivity to the ridiculous reality is heightened by the knowledge that the Fed is allegedly going to cut rates again tomorrow. All well and good, but this could conceivably make the low-yield problem even worse (though how much worse could it get?).

On that note, no matter how much of a rate cut we get, know that the effective overnight rate (not the stated rate we hear so much about) is already rock-bottom. So, a rate cut won’t make borrowing noticeably cheaper… it’s more for show at this juncture.

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By now you’re all well aware of Bernie Madoff’s $50 billion heist - you know the party’s over when the FBI comes a-knockin’. What I’m still not clear about is what actually triggered the investigation and arrest. I think one of his employees got suspicious and reported the oddities. However, I’d love to know the exact details of the red flag that got the ball rolling. I suspect somewhere in the ponzi scheme, someone was supposed to get “paid”, and didn’t. People don’t like it when they’re on the wrong side of the table. (And when I say ‘paid’, I don’t mean employees - the word was that his employees always got paid. I mean there was supposed to be money or stocks for someone, somewhere, but it wasn’t actually there when they tried to claim it.)

Anyway, I’m not here to rehash what’s been all over the news…. you can do that on your own. All I wanted to do was point out an article about Madoff that appeared in a 2001 edition of MAR/Hedge….. a hedge-fund-related publication that’s a little obscure even within the hedge fund world. Here’s a link to the PDF. I can’t find a web page with the article, so you’ll have to use/get Adobe’s Reader if you don’t have it already.

The article is something of a contradiction…. suspicious of the consistent returns and minimal volatility boasted by his hedge fund, yet also impressed by those same returns and minimal volatility. Nobody ever questioned whether it was too good to be true as long as everyone was happy with the results. There’s a lesson in the realization of the truth…. now.

Read today’s news, then read the 2001 article, then compare the two side-by-side. The red flags were actually there, between the lines. I suspect there are more Madoff’s out there, even with all the oversight we now have.

On the other hand, I want to be clear about something else - most hedge funds are completely legitimate. In the same vein, most financial advisors are honest and honorable. They’re not always right, but I’ll take that over something ‘too good to be true’ any day of the week. Keep the 2001 article and today’s news in your mental ‘back pocket’. The next time you hear about red-hot performance and next-to-no risk, pull it out to remind yourself that the best of crooks can fool even the best of journalists.

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So let me get this straight…. the Senate shot down the automaker’s bailout, and three hours later the Treasury steps up to the plate and says they’ll keep the industry afloat since Congress didn’t? I have about a thousand questions; I’ll only ask a few of them…

1. If the Treasury is authorized to do this, why didn’t they do it two weeks ago?
2. Is the Treasury actually authorized to do this?
3. Has our government - and rules of limits and procedure - just turned into one big free-for-all?

The answers are…

1. Don’t know
2. Technically yes, philosophically no
3. Yep - there was never a clear plan for the $700 billion, and any department can do whatever they want now

Frankly, I’m not sure why automakers weren’t lumped in with the first bailout package… the $15 to $50 billion they need is nothing compared to the $700 billion ear-marked in the original bill. And, considering some money from the first bailout was used to assist fisherman, a rum company, and a company that makes wooden bows and arrows, you’d think throwing some cash at Detroit would be palatable. Guess not.

My beef isn’t the money - it’s the complete pointlessness of the process. If the Treasury can do what the Senate won’t, why bother with a bill at all? Just go to the Treasury. On that note though, another question is raised…..who oversees the Treasury? It’s technically the Executive branch (i.e. the President), which as of this morning is apparently how that branch to get around the Legislative (Congress/Senate) branch’s decisions in certain cases.

I’m not here to pass judgment, nor am I going to start accusing anyone of jump-starting communism or working towards a monarchy…. two arguments that have been made quite a bit lately. However, I have no problem saying this mess has become more than a little worrisome for reasons beyond the amount of money and lack of control. The apparent ineptness in Washington isn’t just an opinion anymore - it’s the Wild West… where anything goes.

OK, I’m done venting. Thanks. You can vent too if you like - the form is below.

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