Small Cap Network Blog

Well, a few months ago I never thought I’d see it. Since September though, I have to confess I’m not totally shocked. On Thursday the market fell under - and stayed under - 2002’s lows. We’re now back to where we were in 1997. Buy and hold anyone?

The bad news is, that’s 11 years of wasted time, if you were hell-bent on buy and hold. If you were willing to take profits, and make an occasional bearish bet, you’re probably still ahead of the game. However, odds are you were still adversely affected by more than a little bit.

The good news is, if you didn’t put one penny into the market but know that you should have over the last decade, well, you’re essentially ‘caught up’…. and I’m saying that with complete seriousness. You can start right where everybody else started a decade ago, since they’re back at the same starting line.

Anyway, I came here to talk about opportunity, and reality.

I know the tumble to new lows is supposed to be wildly bearish, and maybe it is. However, there’s that voice in the back of my head that keeps reminding me that the harsh move lower may well have taken out any remaining stops. In a sense this could cleanse the palette so we can finally just get the capitulation under our belt. I’m not saying today was it, but let’s face it - what is there left to prove? How much worse does it have to get? Everybody about as busted up as they could be.

Investors have also been filling up the sidelines for weeks now, holding lots of cash, and adding more and more as time passed. I believe cash positions were greater this time around than they were in October of 2001. Frankly, I’m surprised anybody had any stocks left to sell… but, we’ve transacted tons of them the last few days. Where’d they all come from? Wow. There can’t be much left to sell.

The point is, I can see the market sinking to new lows just far enough and long enough to convince everyone to dump anything they’ve got left, only to set up a major bounce. As such, I’m wondering if we need to take a swing on a bullish trade. I don’t know if it will be the beginning of a new bull market, but I think it could still be a nice upside move … if only because nobody expects it.

I don’t know - maybe the gears in my head are just spinning really fast right now. Look for more thoughts on this potential trade tomorrow.

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I realized after I had e-mailed Thursday’s introduction to Stratos Renewables (SRNW) I didn’t actually include a suggested stop price. Sorry about that - I was trying to calculate some last minute numbers, but didn’t get that one actually typed in. Anyway, I think 70 cents would be a good stop level. That’s what will appear on the trading parameters.

One thing I want to stress again is that Stratos is really more of a long-term idea. There’s probably some value to you if you’re looking for a short-term ‘trade’ (which is who the target and stop is for), but the big ’investment’ really isn’t on yet. We want to observe what kind of progress the company makes towards production. The projected numbers are huge though, so we weren’t kidding when we said this could be a big winner for 2009 and beyond.

Anyway, stay tuned to the blog tomorrow morning. There may be some volatility we have to work through or think about early in the morning for any traders. I’ll blog anything that may need to be decided.

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In the very short run (as in a couple of days), I’m fairly bullish. Longer-term, I’m bearish, based on yesterday’s breakdown and today’s downside follow through. After yesterday’s beeline from the open of 859 to the close of 806 for the S&P 500, I was expecting an upside reversal from the onset today (as I described in an earlier blog entry). Instead, we opened much lower, and then continued to sink.

So how am I bullish in the short run? The VIX hit its upper Bollinger band, and the market is well above its lows for the day. I think both are the result of just falling too far, too fast. I’m looking for a quick correction of the drastic move lower (which means a brief bounce), and then a continuation of the bigger-picture selling… all three indices hit new multi-year lows today.

One caveat - I don’t know that I would try to trade any of this just yet. We may be due for a short bounce, but I’m also looking back at the S&P 500’s chart between October 2nd and October 10th. We saw seven straight days of massive losses, and there’s certainly no reason it couldn’t happen again.

But what about the VIX? It also did the uncanny between 10/2 and 10/10, by plowing into new high territory without a second thought. So, we can’t make assumptions here either.

The best thing the bulls have going for them at this point is the VIX’s gap this morning, and the upper Bollinger band. That ain’t much to take to the bank though.

Let’s see where this all goes; I’m not fully convinced either way.

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Maybe you saw this morning’s letter from Voyant International’s (VOYT) CEO Dana Waldman? If you didn’t, I don’t know that you missed a whole lot - it was a brief update on some of the current projects….white space radio, RocketStream, and Aviation Broadband. There was one new item that came up though.

Remember the name ‘RocketConnect’ - I suspect we’ll be hearing it more in the near future. As near as I can tell, RocketConnect is RocketStream for consumers. RocketStream was targeting businesses and organizations with massive data transfer needs. RocketConnect is targeting end users - ordinary people at their desktops and laptops - to accelerate the speed at which they send and receive information over the web.

I couldn’t perfectly tell, but it appears as if this product is going to be piggy-backed somehow with Internet services already being provided to consumers. Maybe there’s some sort of revenue sharing arrangement being forged with ISPs. The reason I say that is simply because Waldman said to think about the potential sales volume on the same scale as cable/telco volume.

It’ll be interesting to see what it is and how it plays out.

Everything else in the letter was fairly predictable.

By the way, did everybody see Voyant’s most recent 10Q? It quietly came out Monday, and was essentially what we were looking for… a little more revenue, but nothing life-changing. They pulled in $177K. For comparison, they did $133K last quarter. So, the increases are coming. (Any increase last quarter is impressive.)

What’s been fascinating for the last two quarters now is the massive gross margins we’re seeing. Their cost of sales was $30K last quarter, and only $13.3K this quarter. That’s a gross margin of more than 90% … which is why software is such an attractive business to be in. I think margins will head lower as the other business ventures ramp up. But still, that’s impressive. RocketConnect will be the same way - once developed, it costs nothing to share it, yet it still bears revenue.

The stock is perking up today, but I don’t think the letter is the reason.

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You probably know by now the market reached and stayed at new multi-year lows on Wednesday. Obviously that also meant those key support levels are broken (except for the Dow). Though the momentum seems bearish, there’s something that keep nagging at me, suggesting we shouldn’t get suckered into selling anything new at this point. 

Remember what I was saying a couple weeks ago about extremely big moves that end the day at the very end of the range? Those tall candlesticks with little to no wick are called ’Marubozu’ bars. Normally they’re interpreted at face value … a bearish Marubozu bar means more downside is on the way, and a bullish Marubozu means bullishness is in store. In the current environment though (the last two months), Marubozus have more often meant an exhaustion of that trend, and signaled a reversal.

Well, care to guess what kind of bar we got yesterday? I’ll give you some hints - the market was down a whopping 5%, opened at the highs for the day, and closed at the lows for the day. Yep… a Marubozu. Not that it’s the gospel, but we’ve just seen too many reversals following extreme moves lately to ignore this one, or to assume more selling is in store right away.

As I write this, the futures are in the red, which sort of works against my theory. Then again, the futures have been a meaningless indication of how we’re going to open lately. I’ll actually wait and see how we open, and then see how we progress.

If the indices get comfortable down here, then I think we all need to start hedging, buying puts, shorting, or whatever it is you do to stave off a selloff. Let’s see how things play out before pulling the trigger though.

Check my other forthcoming blog entry though - I’ll be looking at a couple of things that are close to pointing to bullishness.

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The sellers have thrown everything they can at the bulls over the last three days, and have certainly done some damage. However, the market has managed to hold its ground so far. On the other hand, we’re about as close to the edge of the cliff as we can get before actually falling off.

Lo and behold, the same support lines I’ve been talking about since October are coming back into play today. For the S&P 500, that’s roughly 818 … last Thursday’s low, but also the rally point for the huge one-day bounce. Today’s low so far has been 827, but the bears are definitely putting the pressure on…or were, until late in the day. The Dow and the NASDAQ aren’t knocking on the doors of new lows yet, so I’m not overly worried.

However, I am kind of concerned about the VIX, and the apparent lack of fear investors are showing as we’re on the verge of even further long-term losses. Granted, we’ve also become largely immune to big losses, but the VIX has at least responded as expected during selloffs. The VIX closed a little lower, as the market closed a little higher. But, both moves lacked a little conviction (and we’ve seen it a dozen times now - a reversal late in the day that doesn’t even survive through the next day).

The ‘lack of fear’ is evidenced by the way the VIX has not yet run into that upper Bollinger band. That means there’s more room for it to move higher before it starts to hit a headwind. Stocks could fall in the meantime.

Now, will stocks fall? Don’t know - this is an odds game, not  a science. I don’t want to bet against the market until those support levels are broken, but I also don’t want to be on the market while the VIX is on the rise. Today’s turnaround at 3:00 p.m. EST just makes the matter more deceptive. So, I guess I’m choosing not to play until I know there’s a hand I have a better-than-average shot at winning.

One way or another we’ll have some clarity soon. I just think it’s still a little bit bearish that the selloffs are still coming so easily, and we’ve started to spend more time on the southern end of the recent trading range. 

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Yesterday I opened this can of worms, vowing to open it a little further today when we got more data. Well, we did indeed get more data about last month’s and last quarter’s retail sales. October’s retail sales fell by 2.8%… the biggest plunge ever. What had been the biggest drop-off ever was the 2.65% dip in November of 2001. Nordstrom (JWN), JC Penney (JCP), Abercrombie (ANF), and Kohl’s (KSS) all reported numbers that were well under last year’s comparable results, though they at least met or exceeded the lowered expectation. Here’s the basic breakdown…

                               Actual EPS      Estimated EPS   Same Quarter Year Ago EPS
Nordstrom                  $0.33              $0.31                        $0.68
JC Penney                  $0.55              $0.54                        $1.17
Abercrombie                $0.72              $0.71                        $1.29
Kohl’s                         $0.52              $0.51                        $0.61

Clearly nobody’s doing great, though two names stick out - Kohl’s, and Wal-Mart (which was specifically mentioned in yesterday’s look).

Based on these results, I think we can take the hint that the consumer is feeling real pain right now, which translates into pain for these companies. That’s tough part about being in a discretionary business … even when things get challenging, the “I want it” mentality can drive sales. Now though, these stores are dealing with “I just don’t have the money” problem - a different beast altogether.

The reason Kohl’s and Wal-Mart have been able to survive - and dare I say thrive - is simply that they’re more able to meet basic needs at a reasonable cost. TJX Companies (TJX) deserves an honorable mention as well on that front. For the retailers that sell goods on the upper end of the price scale though, it’s ugly. The numbers don’t lie.

There are a few more retailers to report next week; I’ll keep examining the data as long is it’s relevant.

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Like clockwork, the market zigged just when everyone was sure it would zag. In some respects the market almost forced traders to zag, by taking out prior lows … even if only for a few hours. By the end of the day though, anybody who got spooked out (or stopped out, when the S&P 500 feel under 845) was kicking themselves when the very same index rallied 6.9% to close at 911.29. Hopefully that was none of you, particularly after I wrote this is yesterday’s newsletter….

“I drew my line in the sand at 845, while today’s low ended up being 850.48 …. Before we all start jumping to conclusions, I wanted to pass one last idea along - don’t freak out just because the S&P 500 trades under 845 for a while (as in a day, or even a few hours). Why? I’ve got a feeling there are a few million traders watching the same line, knowing there are a lot of stops just below that level. It wouldn’t take much to push the market a little lower than 845, only to stop out all those traders. Then, when the selling gets triggered, some bigger fish could swim in and buy into that selling (and consequently pick up some bargains) … If the indices stay under recent lows for a day or two, or show no hint of a rebound (or if the selling volume finally picks up), then the market could make a legitimate leg lower. I’d be suspicious of a mild bearish move or gap lower though, especially if there was no follow-through … I just don’t want anybody to get faked out needlessly. Just for the record, I’m not buying yet, but I might be buying if the bears pass up the chance to take us even lower.”

What happened today was precisely what I was talking about.

If you did get taken out at the exact wrong time, don’t worry - another opportunity is just around the corner. Just tuck the lesson away in your back pocket for next time.

As for what’s next market-wise, I’m encouraged by today’s firestorm of buying, but I still have the same concern I’ve had all along… it’s tough to keep rallying at such a blistering pace. I can see the market cooling off a little after today. It may not be tomorrow, and it doesn’t have to be a drastic dip. But, a 7% rally is tough to follow-up on.

But hey, it’s better than the alternative… which was another meltdown.

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Not that three retailers’ results mean everything, but in looking at who did well and who didn’t, I have to wonder if the consumer is just playing dead, or is actually dead. Most spenders say they’re cutting back, but never actually do so. This time around they may be putting they’re money where their mouth…. or I guess not putting their money where their mouth is, as the case may be.

There are a handful of retailers who report later today and tomorrow (like Kohl’s, Nordstrom, Abercrombie and Penneys), so I’ll update this list later on. I want to go ahead and plant the seeds now though - check out how retailers have fared, which is almost entirely a function of top line sales…

                         Actual Quart. EPS        Estimated Quart. EPS       Comp. Quart. 1 Year Ago
Macy’s (M)                 $(0.08)                        $(0.19)                                $0.08
Wal-Mart (WMT)         $0.80                          $0.76                                  $0.70
TJX Cos. (TJX)            $0.54                           $0.55                                  $0.54

Not that Macy’s (M) is uber-high-end, but let’s face it - it’s not a discounter like Wal-Mart (WMT) or TJ Maxx (TJX). I just find it interesting that the brand-name department stores and specialty stores were specifically doing well through the early part of this year, while discount chains were turning in mediocre performance. Then a few weeks ago, all those roles got reversed.

An obvious consequence of a recession? I wouldn’t say so. It seems logical, but in reality consumer spending on high-end goods (the ‘wants’ instead of the ‘needs’) rarely actually tapers off… even if money is tight. So, the ‘value over luxury’ theme is largely a myth - or was a myth. Now it seems to be a reality.

Like I said, a few more stores will be reporting over the next day or so, and might re-paint this picture slightly. It’ll be interesting though… and probably not in a good way.

If the data above is a trend and not just a snapshot, then Wal-Mart is really jerking us around. They actually lowered their Q4 outlook even though Q3 profits were up 10%, and sales were up 7.5%. For most retailers and apparel makers, sales were down significantly last quarter. Liz Claiborne’s (LIZ) sales were lower by 16% last quarter, and Best Buy’s (BBY) revenue fell by 7.6% in October.

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The media pounced on the rising TED spread when they thought they could scare the crap out of all us with it (which they successfully did). So, how come these same reporters aren’t buzzing when the very same TED spread - a measure of willingness to lend and extend credit - is back to normal levels? I guess good news is the same as no news. Anyway, check it out - the TED spread says the lending market is basically healthy again.

I don’t want to dive all the way into what it is and how it works. If you want the complete explanation, here’s our initial coverage of what was then a sky-rocketing TED spread. My point today is only to let you know the good news…..that the TED spread is at 1.75. That’s not as low as the sub-1.0 figures we saw in the middle of the year. However, the credit market survived bouts with a TED spread above 2.0 late last year and early this year. So, 1.75 is plenty adequate. Besides, the spread is also still in a downtrend.

Here’s the chart from Bloomberg, which actually does not give you today’s data. Even without it though, you can see the change.

Will this save the market from certain doom? Depends on your perspective. I don’t think anybody cares about the TED spread right now, and I doubt they’d be net stock buyers today even if they did know. In the long run though, this does mean things (i.e. loan money) are flowing again. That’s good for the economy, which is ultimately good for the market. It shouldn’t take more than a few months or so for the full effects to materialize.

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Figures. It’s deja vu all over again, as the market got spooked by a combination of things just when it was approaching new highs last week. The last five days have erased all that work, and pulled the S&P 500 back to the lower side of its trading range. If we get back to 845, it will be the third time we’ve fallen into it in a little over a month.

If today does anything, it reinforces yesterday’s newsletter “The Cure For Sideways-Market-Itis“. Take a look at the chart; we’ve got a response to some feedback afterwards.

Thanks for all the accolades regarding yesterday’s edition. We got some great feedback, but one respondent made a great point that we want to mention here. Basically, he suggested using this range-bound market to focus on trading rather than investing. Since the market is being pushed around by the big guys anyway, and gains or losses are made overnight - not intraday - this is the environment in which you best make money by playing the range rather than waiting for a break outside of it.

In a nutshell, we agree. There’s a big range between the upper edge and lower edge of the S&P 500’s range. If you can tap into the ‘travel’ up and down the 150 point span (or even part of it), you could actually do quite well. I don’t know that I would want to trade stocks or indices, but you might leverage the trade with an option or a leveraged ETF. These would only be trades lasting from 2 days to maybe a week, but it’s better than nothing.

It’s not something we mentioned specifically on Monday, but we do advocate options from time to time. 

This also isn’t the kind of trading we can issue recommendations for via the newsletter, but only because of logistical restrictions. We tend to direct our thoughts towards investors, albeit aggressive investors.

Anyway, yeah, playing this range may not be a bad idea for a while. The market doesn’t seem willing to give us much else.

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We’re now entering the thick of earnings season again, and obviously things are going to be a little nastier than they were a year ago, or even three months ago. However, the question is whether or not earnings will be better or worse than expected. (Meeting a low expectation can still be a good thing for a stock.) And, the same applies to the overall market….if companies aggregately beat the average expectation, it could be good for the whole market.

With that in mind, here’s some key earnings data for the S&P 500, which is currently priced at 930.99. (By the way, I’ve got forecasted sector P/E’s below…which is actually the whole point of this entry.)

The consensus estimate for forward-looking 52-week operating earnings for the S&P 500 is now $90.65 (P/E = 10.27), which is down from $102 (P/E = 12.1, at the time) a couple of months ago. And, trailing operating earnings are reported to be $61.27 (P/E = 15.2), which is down from $91 this time a year ago (P/E = 16.7, at the time).

I had to read the numbers a couple of times to figure out what I was missing, ’cause they just don’t jive. Then I came to this conclusion - the estimates jive….they’re just still too optimistic.

Basically what Standard and Poor’s is saying is that stocks are undervalued compared to where they were two months ago, AND they’re going to be about 33% more profitable over the next twelve months than they were over the last twelve months. In short, they’re predicting a full recovery back to 2006’s earnings levels (when times were pretty good).

My question is this - what’s going to happen over the next year that will cause earnings to improve from $61.27 to $91.00? I’m not saying it can’t happen…I’m just saying “show me why and how”. After all, they were wrong two months ago about where we’d be now. Why should we trust ‘em about where we’ll be 12 months from now? (That’s a rhetorical question, of course.)

That said, I want to clarify my stance….I’m optimistic too, but only because I know stocks don’t always trade at that they’re worth. I think 2009’s valuations won’t be as attractive as guessed by our friends at S&P because stocks will be priced at what the market thinks they’ll be worth in 2010. That’s why I’m planning on ‘paying up’ a little in 2009 for decent equities…they’ll be moving higher in advance of earnings results. I won’t be worried about doing so either, at least not until I start to see P/E’s (trialing) reach above 17/18-ish.

That’s not exactly what I came here to talk about though. I actually came here to talk about sector valuations, and making meaningful valuation comparisons within a sector. You know - apples to apples.

See, I’ve got a feeling in 2009 we’re going to start seeing some serious sector divergence, which we didn’t see much of in 2008 - all sectors stunk. I’ve got some opinions on which sectors will be hot and cold, but I want to lay this groundwork first because it will be a large part of my selection strategy.

The nearby table lays out Standard & Poor’s forecasted P/E’s for all the major sectors (as of November 4th). My strategy is a simple peer comparison. Basically, if I’m looking for undervalued stocks, the forecasted P/E (or even the trailing P/E) has to be as cheap or cheaper than the respective sector.

Now, do I trust the Standard & Poor’s forecast? The whole point of the rant above was to illustrate how even S&P can be too optimistic for the overall market, so I have no reason to think they’d suddenly be realistic when it comes to sector earnings forecasts. However, as long as they’re consistently overly-optimistic, we can still make useful comparisons.

In short, on a forward-looking (2009) basis it looks like Standard & Poor’s thinks stocks are trading at about 2/3 their historical values. That’s pretty exciting, though perhaps a little too enthusiastic. Still, even if companies fall short of the expectation - and I think they will - I still see some significant value in technology, energy, telecom, and general industries. I have to like financial stocks too, but that’s not really based on valuations….that’s just based on them being so beaten up.

This is just the beginning of creating a sector outlook. Stay tuned as I rationalize my way though a complete sector forecast for 2009, though sector rotation is a journey and not a destination.

Some of you will know exactly what the FCC’s ‘white space spectrum’ headline means; most of you will probably have no idea what it means. All of you, however, should be interested in what it means. Why? Tuesday’s decision from the FCC is a proverbial green light to cultivate a whole new means of digital information delivery, like television, radio, and Internet connectivity.

If you happen to own Voyant (VOYT) shares, this is compelling news. However, it’s equally compelling if you also happen to own Google, Motorola, Dell, or Hewlett-Packard….all of those have an interest in advancing white space technology as well.

Here’s the deal - for those of you 40 years old or older, you’ll remember there was a point in time when there was no ‘cable’ television. You got true ‘channels’, where the number of the station was also the radio frequency of the broadcast. The channel numbers ran from 2 all the way up to 51. Well, channels 2 through 20 are still reserved for broadcast, even though using air waves is almost a thing of the past. Channels 20 through 51 though, they’re no longer used by anybody….but the FCC still regulates them.

Since radio frequency ‘real estate’ isn’t infinite, some new players recognized that UHF channels 20 through 52 are the only opportunity to establish new communication lines. The cool part is, modern technology can use these channels not just for television broadcasts, but for any digital message. THIS INCLUDES INTERNET, RADIO, SOME TELEPHONY, and of course, DIGITAL TV.

See the reason for the interest? This is a whole new playground that virtually anybody can enter; there won’t be conflicting or overlapping channels to limit competition.

Better still, it’s not like there are merely 32 channels up for grabs here. Digital equipment can be tuned to receive and transmit at fractional frequencies….like 20.1, 20.2, 20.3, and so on. I don’t know how many actual ‘channels’ can be set up, but I think it numbers in the thousands. In short, there’s really no limit now to what can be done, if it’s digital.

Now, I said all that to reiterate something we haven’t mentioned in a while - Voyant is jockeying to establish a major presence in the white space spectrum. They’re already building $2 million worth of white space frequency radios, but their technology could be adapted to use for WiFi purposes, or wireless communications. 

They’ve also been quietly developing Voyant Productions - the entertainment arm of the company. If you can control the delivery method, why not generate revenue by offering what’s delivered? This may eventually mean movie/television production and distribution.

Anyway, the FCC has officially opened up those white space channels for this kind of use. I thought it was a ‘done deal’ in the summer, but a few groups balked at the decision, and managed to get it delayed. The opponents were just groups that had something to lose though, like market share. The FCC is pro-competition though (usually), so this outcome was inevitable.

It’s good news for Voyant International and any VOYT shareholders. It won’t put money in the bank immediately, but this is a big victory that could open the door to literally millions of dollars.

I’ll let you know more when I know more.

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Ya’ gotta’ love Yahoo! Finance. Nothing gets past these guys. Take today’s bold headline for instance. Based on unemployment rising to a multi-year high of 6.5%, the “economy is almost certainly in a recession”. Really? Thanks.

Perhaps they’ve not seen the financial Armageddon we’ve all been immersed in for over a year. Unbelievable. Here’s my concern though…

A lot of people read Yahoo! Finance as their sole source of investment guidance. If Yahoo is this late and this indecisive about saying we’re in a recession, will they be equally late telling us it’s over?

Folks, the stock market leads the economy anyway - up and down. So if you’re using economic data to make market calls, you’re already lagging. If you have to wait for some site like Yahoo! Finance to get around to confirming what is obvious, then you’re really behind the eight ball.

So, here’s my message - the recession is well underway, but the bear market is over. That’s why I’ve explicitly said (repeatedly) you can’t worry about valuations right now. Fundamentals mostly look like crap. However, fundamentals didn’t look all that bad late last year - or even early this year - yet stocks got crushed. By the same token, stocks can rise even though fundies look bad right now.

“Almost certainly in a recession”…geez. That’s like telling us now to bet on the Phillies in last month’s World Series.

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Well, as I alluded to in this morning’s newsletter, the actual announcement of the news is creating less buying inspiration for China Energy Recovery (CGYV) than we saw prior to the news. It’s not been a bad day - the stock is basically flat. However, volume is on track to be considerably lighter, and the upward momentum has obviously taken a break. So, as promised, I’ve got some direction for anybody who’s currently in a trade.

If your only goal was a short-term swing trade, and you got in on Tuesday or Wednesday, I suggest you go ahead and get out. There’s a bit of a market for you, but it just doesn’t look there’s much gas left in the tank for this trip. Take the bird in the hand and move on.

Why that stance? Like I said, volume is the key…there’s not much of it today, and there’s no bullishness either. If the news was going to spark further gains, it would have done it right out of the gate (on stronger volume). Just consider yourself lucky we’re basically where we left off on Thursday.

If you’re in a long-term position, I don’t think you need to bother doing anything besides preparing for some sort of minor pullback. There are profit-takers waiting in the wings. Though they aren’t taking action today, I still sense they’re out there. No big deal…they shouldn’t create too many problems.

If you’re still thinking about getting into a long-term trade, I don’t know that I’d bother just yet. See the previous paragraph for why. I’m not bearish per se, but I suspect we’ll see CGYV shares trade a little lower before too long, to burn off some of the froth left behind by a 76% gain in two days. A decent dip is a good entry opportunity (though it would be much easier to buy on the way up than on the way down).

As far as timing all of this is concerned, we’ll have to watch the chart one day at a time. ‘The dip’ may be Friday, or Monday, or maybe even later today. I’m also not sure how big it will need to be. The right dip is kind of like talent….you’ll know it when you see it.

However, I’ll also remind you that China Energy Recovery will be presenting itself at the Rodman & Renshaw Investment Conference on November 10th (Monday), and will be at the Westergaard Conference on November 12th (Wednesday). Both venues will introduce CGYV to some new potential high-level buyers, so don’t be shocked to see some more high-volume rallies next week…if those funds and money managers like China Energy as much as we do. That doesn’t exactly leave the ‘dip’ window open for very long, but that’s actually a good thing.

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Don’t get too worked up about today’s still selling. After a pretty good six-day stretch (4 winning days, and 2 flat ones), a little bit of a pullback could be expected. The bigger uptrend is still intact. In fact, this selloff today may end up being an important clue to bigger, more bullish things. It will give the trend a chance to verify that it has some staying power by (1) surviving a selloff, and (2) rebounding from a selloff.

However, that’s not really what I wanted to focus on right now. What I wanted to point out was the VIX. Its chart is the reason we don’t need to get overly worried about today’s action.

If I haven’t introduced Bollinger bands to you guys yet, get ready for a crash course.

Bollinger bands are just standard deviations wrapped around a chart’s moviing average line. In other words, 20-day, 2 SD (+/-) Bollinger band lines are plotted 2 standard deviations above the 20 day average, and 2 standard deviations below the 20 day average.

(If you’re not into statistics and math, don’t worry…I’m not either. The only thing you need to be able to do is visually recognize and use Bollinger bands. It’s infinitely easier than calculating them.)

Since a picture is worth a thousand words, let’s just use one. This will all make sense then.

In a nutshell, Bollinger bands tend to act as limits - support and resistance - most of the time. Once a chart runs into a Bollinger band, a reversal is likely. It works both bearishly and bullishly. There are cases, however, where Bollinger bands not only don’t repel a stock, but actually provide a guiding line for a continued trend.

That’s the upside and downside of Bollinger bands….they’re useful, but can also require two completely conflicting interpretations. Learning when to apply which strategy is more of an art than a science.

Anyway, the most common Bollinger band settings for traders seem to be 20 day band lines, at 2 standard deviations.

So what does any of this have to do with the VIX? The VIX ran into its lower Bollinger band yesterday; it appears to have pushed off of it today. This is almost a textbook example of how the lower band line acts as support, or a reversal level. Take a look.

So, it’s not entirely surprising to see today’s pullback. This was the area where it should have started to happen.

Now, there’s no sense in ignoring the 800 pound gorilla sitting in the room. How come the upper Bollinger band didn’t push the VIX lower back in September? If it’s a reversal point now, why wasn’t it a reversal point then?

Great question. There’s no single correct answer. That’s why I mentioned above that there’s an upside and a downside to Bollinger bands, and interpreting them is an art. Truthfully, you never really know at the time whether a band line is going to send a chart in the other direction, or blaze a trail for the chart to keep heading in its present direction. Either way though, the Bollinger bands can show you the moment of inflection…..the proverbial fork in the road. Once the Bollinger band doesn’t reverse the trend, you can usually count on a pretty long continuation like we saw in September. It ain’t a perfect tool, but it’s a good one when used in conjunction with other tools (like your brain).

More pertinent to today, based on the way the band lines prompted the reversal, I’m not worried just yet - this was to be expected. As long as the 10 or 20 day moving averages for the VIX keep the VIX’s upward move contained, this bearish reversal won’t mean too much.

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(And yes, I would have said the same thing if McCain had won.) I know a lot of you were jockeying for one Presidential candidate over the other, since there’s a widely-held belief that one political party - or the other - is more accommodative to the stock market. In fact, I’ve seen members from each party come up with data suggesting their party is better for investors. My thoughts on this exercise? It’s amazing what you can find when (1) there’s enough data to choose from, and (2) you look hard enough to find the data that supports your case.

Folks, it’s an argument that will never be settled. It may even be a question that doesn’t have an answer.

In my experience, the controlling party has little to nothing to do with how well the market or economy does. Investors are just ‘votes’, and are scared or encouraged by candidates in an effort win an election. The truth of the matter as I see it is (after years of working in the equity market, and years of being an amateur political analyst) each party has caused good times and bad…and it has nothing to do with political philosophy.

Some stocks will do well under Obama. Others will not. The economy will eventually flourish under Obama. If he stays in for a second term, odds are the economy will eventually suffer under Obama.

You can’t get bogged down by something you can’t control, and something you can’t time. Obama can’t do it either. The best we can hope for is to delay and minimize the downside (which is something George Bush admittedly didn’t do well). 

The reason I bring it up…..even just a few hours removed from the election outcome, we’re already hearing the pros and cons for investors.

Here’s the bottom line - nothing has changed for investors. Stick to your strategies, find good companies, pay attention to charts, and monitor the underlying trends overlooked by everyone else. That’s all we can do under any party’s regime. It’s always been enough though.

For what it’s worth, I have no more and no less faith in the market than I did a day ago, a year ago, or a decade ago. I know eventually it will move upward, but I know there will be a lot of ups and downs in the meantime. A donkey or an elephant can’t change that.

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Happy election day everybody. I trust you’ve already voted, or at least made arrangements to. They weren’t kidding about record turnouts causing long waits, so plan accordingly if you still need to cast your ballot. Please vote though... you never know when one vote makes a difference. That’s not what I came hear to talk about though.

Remember back on October 27th when I suggested a few specific industries were ideal picks for a tough environment? The argument was that certain sectors would benefit more than others as we enter the heart of a recession (which I now believe we’re in). Those picks were utilities, mid cap airlines, mid cap reinsurance, mid cap general merchandise stores, small cap personal products, and small cap pharmaceuticals.

In a nutshell, those groups - though for various reasons - all met my four-pronged selection criteria. Those four criteria were fundamentals, technicals, the market environment, and the state of the economy. Those are the four main influences on any stock’s price.

Well, here’s how things have taken shape since the 27th…

That’s pretty impressive for only seven trading days, though it’s interesting that these groups have slightly underperformed the averages.

I don’t say it’s ’surprising’ simply because the recent revival of bullishness has attracted investors to high-growth or totally-deflated arenas like construction, energy, consumer finance, casinos, chemicals, autos, and telecom. I like all of those too, but I think the ’shiny’ will wear off on those groups pretty soon. When it does, I look for the groups I first mentioned to fall back into favor again.

So why is my preference still more for safety and value, and less for aggressive growth? I think the bear market is over, but I think the recession is just beginning. All stocks will benefit, but not all companies will benefit. (And yes, there’s a difference.)

By that, I just mean results will eventually have to support valuations, and I don’t think casinos, auto-makers, construction companies and the like are quite ready to do that well yet. Eventually - like mid-2009 - yeah, maybe. But now? No, I don’t see it. I’ll still take on proven performers for the time being.

That’s not to say you won’t find some good ‘trades‘ in the meantime. Have you seen some of the hottest industries that have led the rally thus far? Here are the best of the best since the 27th….

I wonder if the automobile industry’s stocks are really going to pull out of their funk. Auto sales stats don’t suggest they will, but the stocks are acting like things can’t get any worse for the industry. I see a lot of basic materials names on the top 30 list…steel mostly. Notice how real estate and energy stocks are appearing multiple times as well.

If history repeats itself, one or two of those groups will hold its place as a leader throughout this new bull trend. With that in mind…

I don’t know if I explicitly said this before or not, but if not, here goes….this sector/industry rotation strategy works, but requires constant updating. Sometimes these sector leaders hold their place for days, sometimes for weeks, and sometimes for months. You never know which is which though, so to make the most of the information you have to be willing to ride the trends that persist, and take profits on the ones that are fading.

It seems like a lot of work, but it’s not - these trends usually flow with your natural ‘finds’ anyway. However, paying attention to small details like this can really improve your overall results.

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If you’re thinking things are different now - for the better - you’re not entirely crazy. Though the futures are set to open in the red today (which means nothing anymore), the prior three trading days have gone far in getting the market out of its freefall and into a recovery mode.

Yesterday we made our third consecutive close above the 10 day line for the first time since August, and we closed above the 20 day moving average line for the first time since September. Not that there’s any magic formula or secret number to ‘cross’ before things officially change, but this does point to  a clear shift in momentum…..a shift from ‘clearly bearish’ to ‘not bearish’.

My only concern is that some sellers are just biding their time, as they plan on using this brief bullish retest simply as an exit opportunity. Volume was light yesterday, so the effort wasn’t the majority opinion.

If we can get a higher volume rally sometime today or next week, and if we can break past the short-term resistance line I plotted below (which by default would get us well past the 20 day line), then I could be a lot more confident in any rally attempt. I know we’re more than ripe for it. Take a look at the chart, but then keep reading for a quick take on the VIX.

The VIX’s chart looks like an inverted chart of the average index right now…it’s finding support right around the 20 day moving average line. As I said in a recent blog entry, a close or two under that 20 day line would go miles in telling me the momentum had shifted in a bullish way. See, the support the VIX got at the 20 day average back on October 21st and 22nd was an early warning that the market’s rebound attempt then was failing.

You’ll also see an intermediate-term support line for the VIX that extends back to mid-September. Consider that a confirmation signal line.

In both cases, notice how the 10 day lines (red) are basically flattened, and both 10 day lines are starting to close the gap between the 20 day line (blue). That’s not a huge deal, but it does quantify the notion that the momentum is changing. Like I said though, a higher-volume move in the right direction is what I need to see. Volume is the key to any longevity. 

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I hope the title of this entry didn’t come across as overly-encouraging, since I still see some vulnerability out there. However, as objectively as I can be, things really did appear to change for the better for the market on Tuesday. Today is the key to cementing those bullish changes for the better.

Did you know the S&P 500 has not made two consecutive daily gains since September 26th? We’ve seen five huge single-day gains over the prior twenty-two trading days, but we couldn’t string two of them together. That’s been the problem for a while…no follow-through.

However, we did do something yesterday that was at least a little exciting. Both the NASDAQ and the S&P 500 broke past intermediate-term resistance lines. Check out the charts, but keep reading - we’ve got a bigger point to make.

All of this makes today a critical day; it could be the first time we make back-to-back gains in over a month. To see it happen after breaking through a ceiling just gives it a little more meaning. Until the egg is hatched though, I’m not counting the chicken. U.S. stocks are struggling right out of the gate today, which doesn’t exactly scream bullishness.

On the flipside, both charts have given us some key support lines over the last few days too. The NASDAQ’s line in the sand is 1500, while the S&P 500’s is at 846.

Check back later today - I’ve got a couple of other things I’m looking at (like the VIX and the shift in the volume trend), and these charts may look totally different then. 

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