Here’s last week’s scorecard….the NASDAQ was up 0.14%, the S&P 500 was down 1.08%, and the Dow was down 1.17%. Most of the loss (or near-loss for the NASDAQ) was the result of a weak Thursday and Friday. Those two days unwound Monday’s boost, and were threatening to unwind the surge from the Friday from the week before.

I don’t know what Monday will hold in store; the market has been too erratic to offer any early hints. I still think though (and as I’ve said a few times now) I’m betting against the moves to the edges of the recent boundaries. If we get a gap (bullish or bearish), I’m going to bet the market will move even further in that direction by the end of the day. But, by the end of that day the trend will be exhausted, and we’ll be ripe for a reversal.

So, the most bullish thing we could see for stocks is a much lower open and a big selloff over the course of Monday; by Tuesday AM we’re apt to be rallying again. And, vice versa. I’ll re-insert Saturday’s image of the QQQQ’s, which really illustrates my point.

Monday’ always nutty anyway, so it may be best to be on the sidelines until everyone gets all their anxiety out of their system and into the market. Then when they’re done, we’ll wade in.

By the way, you may have seen Spicy Pickle (SPKL) unveiled their Q4 and full year numbers last week. I have no idea why they don’t put out press releases with their quarterly results - this is the second time they’ve done it. Maybe they don’t think they look all that great, but frankly, they’re actually pretty good for a start-up.

Anyway, I’m not going to examine them as deeply as I normally would. Why? Because they don’t mean much. Spicy Pickle is growing so fast, the year-end data from 12/31/07 is already obsolete. Plus, to compare Q4 from last year to the Q4 from a year ago wouldn’t make much sense, again because they’re growing so fast.

The basic numbers….$1.2 million in revenue, and a net loss of $3.6 million. Pretty much what I expected - going public and doing all that fund-raising can take a toll on the numbers, but it’s mostly a one-time cost. Like I said, comparing now to then (or even comparing now to the future) is not apples to apples.

Anyway, here it is if you want to see the whole filing.

On a semi-related note, a recent reader question got me thinking about Spicy Pickle and how to evaluate it. That’s tough, because the franchise model is unlike any other business. The top line usually looks low. The thing you have to keep in mind is that the bottom lines are generally much bigger (relatively speaking). If there were earnings yet, the price-to-earnings ratio would make the most sense. A price-to-sales ratio means nothing, so don’t bother.

Pick of the Day: Emergent BioSolutions (EBS) is an interesting company….the technicals (chart) caught my eye, but the fundamentals kept my attention. They produce immunobiotics, and apparently good ones. I’m not going to say more, because that’s just not in the scope of the ‘Pick of the Day’. You may want to take a good look though. It’s one of those biotech outfits with current sales as well as potential sales from some projects in the works.

The one thing I’m not crazy about is chasing it after last week’s big runup; I’d like it much better after a good pullback and the establishment of a base.

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Sorry I haven’t had a chance to get to all your small cap questions lately. Between V2k (VTOK) and Bio-Matrix (BMSN), I haven’t had much time to get to them. That’s all going to change today though. Anybody who’s sent in a question to the Small Cap Network within the last couple of weeks is about to get an answer…or at least a response. I’ll put them all here in the blog so everyone else knows what other readers are thinking.

1) Hi, Can you provide a recent Balance Sheet for Bio-Matrix?

A. Sure, though I don’t think it means much for this particular stock pick. They have next to nothing. They’re staying afloat by issuing a little debt ($50K for the last round) until they can get licensed…which should be (hopefully) in less than a couple of months. Here’s the last balance sheet: http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001157523-08-001453&Type=HTML

2) Hi Can you recommend a small cap company like mos (Mosaic), pot (Potash) or mon (Monsanto)? Would like to find one to invest in.

A. I can’t, but if you have a brokerage account you may have a screener that could do the job. Yahoo’s stock screener is actually not bad, though I don’t know if you can get that detailed with the industry. MSN’s isn’t bad either. Agriculture has been a good one of late though…maybe worth a look. Here are the screener sites:

http://moneycentral.msn.com/investor/finder/customstocksdl.asp

http://screen.yahoo.com/stocks.html

3) On their (Heritage Capital - HCPC) website they show they close a $672,000,000 BCLOC loan. Their current listing price on the otc.bb is .0004. There has been a lot of talk on Allstocks and IHUB forums that it could explode into the pennies after the funding clears. Any thoughts?

A. I’m nowhere near as enthusiastic as anybody on the boards. Sounds like a pump and dump. I’d steer clear.

4) Delcath (DCTH) Believe this company (Delcath - DCTH) fits the profile of the type of companies your profile. 1. $40mill cap 2. about 18mill cash 3. pIII liver cancer study 4. multiple pII liver cancer studies 5. published data thus far has been outstanding (70%+ response rates) 5. NCI partnership 6. Huge upside on FDA approval (could see in the next 12-18 months)

A. Not bad. We’re including it here so our readers can make the decision for themselves. Thanks.

5) Is ZUPC completely worthless now. Is the company still here?

A. It’s still ‘alive’, though barely. We dumped them long ago. Yeah, basically worthless (in more ways than one).

6) i cant understand why you aren’t recommending shorting - this is a phenomenal bull market for shorting - one of the best in years - and i can’t understand why you aren’t recommending short positions - you just plain short every rally and will succeed a minimum of 3 out of five times - the shorts not working you just cover - no big deal at around 7 bucks a trade

A. Oh, we don’t disagree. We personally don’t mind shorting, but not everybody on our list can, or wants to. For those folks there’s always the option of a short ETF or put options. Point well made though…if you’re not playing the downside, you’re missing opportunities.

7) You wrote up a report on SWEB I believe and was wondering how you feel about that now with these big ups and downs. I have held onto it and actually have owned it for sometime. Also could you give any thoughts on ATML.

A. There’s been more down then up for StockGroup, but here’s what we see now…the stock is a nice value idea. I also think the company has been distracted by the new website, which cost more and took longer than they planned. It’s over now though, so maybe they can get something going. Personally, I love the concept of what they do. They just haven’t made enough money (or progress) to justify the share price….at least not yet. Maybe 2008 will be the breakout year (not out of the realm of possibility). At this point you have more upside than downside, I think. As for ATML, I’m torn.

8) Hello, I’m interested in investing in ADR’s but do not want a mutual fund type of investment. Can you recommend sources for independent investors to purchase them for their portfolio?

A. Not exactly sure what you mean here, but I think this will answer…..an ADR is just a single foreign stock traded on an American exchange. As long as you have a brokerage account, you can buy anything any U.S. exchange trades. Technically it’s not direct ownership of foreign stock, which is either difficult or impossible to do for most retail investors. To facilitate the American ownership of foreign stocks, a company will buy foreign stocks, and issue what are essentially vouchers for that stock to U.S. investors. It’s a basket concept (like an ETF or fund), but there’s only one stock in the basket. As for resources, find all the ADRs right here. http://www.adrs.com/. In terms of other resources, you’ll find most ADRs peppered in along with American stocks, so wherever you find those, you’ll find most ADRs.

9) Ran across this on spng from Beacon (traders notes) Link: http://www.beaconequity.com/index.php?option=com_content&task=view&id=885&Itemid=73 Does this mean it is now a good entry point on spng. Thanks for the input

A. It should mean it, but nothing has helped SPNG yet. So, no.

10) Can you tell us what has happened to or the latest info on Source Petroleum Inc. (SOPO). The stock seems to still be trading but the last news information they released was in 2007. I cannot find a quarterly report and the web site Source-Petroleum.com has been taken down.

A. I can’t find anything either, which is never a good sign. They also stopped reporting to the SEC, which is a particularly bad sign. I say take the non-presence at face value….they’re dead or near death.

11) Hello. Thank you so much for the stock picks over the last several months. You guys do a great job. I was wondering if you could find out the first couple locations of the kiosks that are going to open up selling the window treatments, etc. I like to see things first hand, and this will allow me to get an early read on the worthiness of this extension. Thank you.

A. I can’t, because they don’t want anybody to know (including me) for proprietary reasons. I can show you one though….it’s then image nearby.

That’s it for now, but keep ‘em coming.

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Well, they’ve gone and done it again. Small cap company Smart Energy Solutions (SMGY) has found another partner to help distribute their Battery Brain product, incrementally adding the number of units they’re likely to sell on a ‘per month’ basis. Back to that in a second; first a look at the details of the news for owners of this small cap stock pick.

Actually, it’s not quite accurate to say they found a new front-man for the Battery Brain. It’s the same device, but it’s going to be sold by OnGuard Dealer Services as a private label item. That’s not the big deal though…Smart Energy sells a lot of the device under someone else’s brand name. Take Honeywell (HON) for instance - well, actually their subsidiary Autolite. Autolite sells the battery-saving hardware under their own brand name. Smart Energy still scores some nice wholesale revenue from the effort though.

No, the big deal here is OnGuard’s market - car dealers. We’ve seen Smart Energy tap into this market slightly, when they announced a Macon, Georgia Kia dealer was going to start offering the ‘Reserve Power Module’ (which is just a Battery Brain for dealers) on its cars. That was just one dealer though. Today’s news opens up a relative universe of new and used car dealers. The scope of the potential is the exciting part.

Per the press release, 40 million used cars are sold every year in the United States - a number I was surprised by. There are also about 16 million new cars sold every year in the United States - a hefty number I already knew of. That’s about 56 million potential ‘customers’ for Smart Energy each and every year.

Will OnGuard be able to get a new ‘Brain’ on the car involved in each of those transactions? Of course not, but given enough time they should be able to get a solid number into some of them. Let’s just think ultra-conservatively though, and say they achieve a 1% penetration - that’s 560,000 units.

For reference, Smart Energy has sold about 180,000 so far, so this is obviously a nice win for the company. (It’s also worth noting Smart Energy is building armies overseas as well, so the number of ‘customers’ isn’t limited to the United States’ numbers.)

I’ve been using an estimated wholesale price of $25 for Battery Brains. That’s probably not exactly right, but my goal is to provide scope - not an accounting statement. At that price, a 1% penetration would translate into sales around $14 million. And frankly, 1% seems on the low side to me. Only time will really tell though.

Anyway, I want to stress again the pace of sell-through the company has been creating of late…about 7000 units per month. Annualized, that’s about 84,000 per year. Folks, as of January of this year they had only sold about 180,000 (total) since March of 2005. The pace is quickening….a lot. That shouldn’t be a surprise though - they seem to add a new dealer, outlet, or representative about once per month.

I know I’ve been singing their praises here, even as the stock was falling (a fairly unpopular decision). I hope it wasn’t misinterpreted as an all-out ‘buy’ opinion. My point was just that the company was doing its part, even if the stock wasn’t responding. It happens.

Eventually I feel the stock will be priced right. And truthfully, I don’t think SMGY is necessarily priced ‘wrong’ at the current level of 22 cents….based on current results. The thing is, current results are on track to be topped in the foreseeable future. I’ll let the chart tell me when the best time to buy may be. A couple of weeks ago I thought it could have been now, though I don’t feel the same at this point. Like I said though, eventually the company’s progress will be reflected in the stock’s price.

Here’s the news release.

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Looks like I’m on something of a roll here….I called for a pullback yesterday morning, and got it yesterday afternoon. The NASDAQ was off 2.2%, the S&P fell 0.3%, and the Dow sank 0.6%. I still think there’s a little more selling needed to shake-off the recent exuberance, and getting to the end of the week today is likely to be all the excuse the market needs to drive ‘em down one last time. The fact that we’re starting the day out above yesterday’s close just makes it that much more likely.

After that - a.k.a. next week - I’m looking for more bullishness. We still have a bigger oversold situation to burn off, which was jump-started by the mini-capitulation signaled by too many new lows on the 17th. So, don’t sweat the weakness too much.

By the way, I had an ‘aha’ moment after I submitted yesterday’s morning call. An easier way of saying what I meant would have (basically) been ‘bet against the open’.

Ingles Market (IMKTA) is strong, AmeriCredit (ACF) was weak, and railroads….well, 2 out of 3 ain’t bad. It’s only been two days though - you think I should work on patience?

Anyway, for those of you who’ve been around a few months, Smart Energy Solutions (SMGY) has taken another big step towards their end goal. Click here for the detailed comments; here’s the teaser….they have another dealer, but this one has access to largely a new audience.

Chew on this…imagine 21,200 potential ‘retail stores’ all suddenly selling your product. Now imagine more than 40 million potential new ‘customers’ created every year. If you’ve only sold a few hundred thousand pieces of your product to date, it’s exciting news, right?

I’m telling you people, I think Smart Energy is one of those companies that’s gonna’ quietly work they’re way into success, and then be ‘found’ overnight by the market. Maybe it will be tomorrow, next month, or next year. Sometime though. The hare may be sexy, but don’t forget the tortoise won the race.

Regardless, click here for the full scoop.

Pick of the Day: Bio-Matrix (BMSN). Come on - you didn’t expect is to say anything else after yesterday’s profile, did you?

By the way, check out another of our recent picks…Tenet Healthcare (THC). Not bad…for those who got in and stayed in. The chart looks a little cup-and-handle-esque, which may turn good news into great news here. The trade is up about 30% from our pick price, but the slingshot effect of a good cup and handle pattern could swell that number up pretty nicely.

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On Wednesday, the Dow lost 0.88%, the S&P 500 fell 0.88%, and the NASDAQ was lower by 0.71%. Week-to-date, they’re all still (respectively) up 0.5%, 0.88%, and 2.93%…..a decisive lead for the NASDAQ. Note that in all three cases, it was Monday’s bounce that created the gain. Also note in all three cases that Monday’s bounce still didn’t actually carry the index to any meaningful level that signaled the slump is over. The pattern we discussed in yesterday’s morning call? We have no reason to think it’s not going to repeat itself again.

We’re looking for a short-term pullback, perhaps only lasting through the rest of this week. After that, the upside rebound fueled by an insane number of new lows (as we pointed out last week) is still on tap. That may only get us to about 8% above where we are now though. After that, the well will be dry, and we’re looking for the sellers to step in again. Get your Dramamine.

By the way, don’t forget we still have a new small cap trading idea coming out Thursday after the market closes. You won’t want to miss it. This biotech company is sitting on a virtual gold mine, yet is still an undiscovered opportunity….for now. We don’t think it will stay that way for long though, so be sure to tune in this afternoon.

Pick of the Day (a bearish one): AmeriCredit (ACF)…a sub-prime auto lender. The problems the sub-prime lenders started having several months ago? The sub-prime auto lenders are starting to show the same symptoms. The only differences here are (1) there’s no government ‘help’, and (2) the collateral is worth a heck of a lot less than it was when it was purchased. (At least a house doesn’t lose 20% of its value when you drive it off the lot!)

The short-sellers are going nuts here, and I’m inclined to trade with them for a while rather than trade against them. The small rise over the last four months may just be the calm before the storm, ’cause it looks like another round of selling is getting underway.

Industry of the Week: Railroads. If they’re good enough for Warren Buffett right now, they’re good enough for me. It doesn’t hurt that they’re one of the few groups to actually make decent gains the last few weeks. Gold and other metals topped the charts, but I don’t see that lasting. Railroads, on the other hand, might be able to sustain a rally.

Why? Rail freight is cheaper than alternatives. When gasoline (and diesel fuel) are so expensive, every penny counts, and I don’t see oil getting significantly cheaper anytime soon. It’s still fairly hit-and-miss within the group, but I think there are some big (even if a little obscure) opportunities there. They may be a little inflated right now, so waiting for a pullback may not be a bad idea.

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Want to know the price you pay for a huge rebound on Friday and an even bigger one on Monday? It’s a tepid day like Tuesday, and today’s apparent pullback.

This is the mode we’ve been in for two months now….a strong start, but no follow-through (both bearish and bullish). Were the market able to do anything in moderation, we may actually get something going and keep it going. When you open too strongly though - like we did on Monday - and then keep buying without a second thought, you’re soon going to inspire concerns of being overbought. Welcome to the quagmire.

Since late January, an open above the previous day’s close more often than not has meant a close under the prior day’s close (though sometimes it took two days for the pattern to play out). Likewise, an open under the prior day’s close has usually meant a close above the previous close. Take a look.

In other words, the better bet for the last two months has been selling into a strong move, and buying a good dip. Of course, the trade may only last a day or two, but it’s better than nothing in this wishy-washy environment. Which bring me to today’s point…

Don’t get too enamored with this week’s early strength - I don’t think it’ll last. By Friday I may be saying the exact opposite, but I think Wednesday’s early weakness points to an unwinding of the recent upside pop (to call it a rally would be an overstatement).

I’m looking for the SPX to revisit the 1316 area within a couple of days. I suspect the NASDAQ will sink to 2260. After that, I’m out again, waiting for the next over-extension to take an opposiing stance on.

It ain’t investing - it’s trading. My ‘investing’ senses see nothing just yet….except the usual volatility of a bear market. More on that topic tomorrow.

Pick o’ the day: I have no intention of ever following up on this stock, but I thought it was interesting when I came across it yesterday….Ingles Markets (IMKTA). here’s the Ingles chart; the rationale is below.

It’s a grocery store that’s been beaten up way too much for me too ignore. The stock looks like it’s finally getting out of a funk, with some very subtle hints that the buyers are pushing harder than the sellers now. That just means I see higher highs and higher lows….and a momentum shift in favor of the stock rather than against it.

That said, don’t forget we have a new small cap company profile coming out Thursday after the close. If you can only do either Ingles or that one, I think you’ll want to wait until Thursday for us to unveil that biotech stock’s name.

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You would have had to been around for a while - and had a great memory - to recall we mentioned N-Viro International (NVIC) waaaayyyy back in January of last year. At the time this ‘clean coal’ stock was trading right around $3.00. And, it stayed around $3.00 for a long, long time…..months. In fact, it drifted lower - to the $2.50-ish area - late last year.

After taking the year off, NVIC finally got off the couch in January of 2008. By early March it would hit a high of $4.25. So, there is some life still left here, though only for the insanely patient.

Of course, the pullback to last week’s low of $3.00 sort of negates all the gain, so what’s my point?

Take a closer look at the chart. That low of $3.00 was also a retest of, and push off of, the 200 day moving average line. We’re back to $3.70 now, and may be on the rise again. The strong peak and sudden selloff may have just been enough to shake off all the nervous-Nellies, leaving behind the serious traders.

I don’t know whey the sudden renewed interest. Clean coal is one of my mega-trend picks, but with the understanding that it will take a mega-long time for the idea to bear fruit for investors. In the meantime, NVIC may be one of those clean coal investments with a short-term ‘trade’ opportunity.

If anybody has anything to add or offer (about N-Viro or coal in general), please do so below.

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Looks like small cap stock pick V2K (VTOK) is off to a good start following yesterday afternoon’s decision to put it on watch. It may be a little frothy today, but if we see a good pullback and rebound attempt, we’ll likely turn the unofficial trade into an official one. In the meantime though, keep your eyes peeled for Thursday afternoon’s (post close) edition. We’ll have another small cap trading idea for you then…a really cool biotech pick.

I don’t want to let the cat too far out of the bag, but this pre-revenue company is on the verge of removing the ‘pre’ from the description. More importantly, they already have a handful of legitimate revenue sources to work with once they’re open for business. The coolest part of all - they’re not in the R&D business (which can be a risky all-or-nothing proposition). They’re actually in the biotech R&D support business. It’s still profitable, but also reliable.

I may be able to drop a couple more hints in the blog between now and then, but you won’t actually get the small cap biotech company’s name until after the market closes on Thursday.

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Remember what I said back on March 10th about too many new lows indicating a short-term bottom for the stock market? The basic idea was that when things got downright painful, the worst was over…a bounce was nigh. Well, we may have gotten to that point on Monday, if the number of new NYSE and NASDAQ new lows we saw then was any clue. The charts tell the whole story.

The NASDAQ gave us 525 new lows on Monday…close to the levels we saw with the last few rebounds (though they each varied in size and duration)

The NYSE saw 764 new lows on Monday. That was the fourth highest reading in over a year. The last three all came in front of bounces, though only one was major.

Again, I can’t stress enough how no single tool is perfect. This new high/new low analysis works well, but only works great in light of other tools and data.

That said, the odds favored the bounce today, and Bernanke played a role too. The number of new lows said it was time for Bernanke to take action though.

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For those of you old enough to remember what happened in 1974, you certainly remember the infamous jump Evel Knievel tried to make over Snake River Canyon. He got about 1/4 of the way over it; the rest of the trip on the ’sky cycle’ was spent moving vertically….downward. He luckily landed somewhat safely at the bottom of the canyon, without even landing in the water. When it was all said and done (after the 600 foot drop to the bottom) he had horizontally traveled about 40 feet from his starting point. The first 1.2 seconds of the stunt was the only real highlight…the part right up until he was off the launch ramp.

So far, Bernanke’s $200 billion purchase of a market recovery reminds me a lot of Evel Knievel’s Snake River Canyon….a brilliant beginning, but quick turn-around into an expensive freefall. It was supposed to be bullish for the market? Since Tuesday’s close, we’re now lower by 2.3%.

I hate to gloat - and I may end up eating my words later - but this is what I warned you about on Tuesday after watching the Fed’s December auction fail miserably.

Believe me, I’d love to be wrong…I’m trying to sell my house (condo, actually), and need any help I can get. I fear the worst though.

I was fully prepared to have a cynical laugh when I stumbled cross this story, but after reading through it, I have to offer some praise to the online version of the Wall Street Journal. Though about two months late, the WSJ has basically conceded we’re in a recession. The consensus decision came from a survey of economists not employed by the Journal.

I don’t want to repeat what you can read for yourself in the analysis (the link is below), though I will point out this is a very thorough white-paperesque take on ALL of the key economic factors (inflation, interest rates, employment, etc.) For those of you who love crazy details - like me - each specific answer in the survey is logged. So, you can really drill down into the numbers.

The forecasts mentioned by the same economists in the survey are as overly-optimistic as you might expect - most everyone is looking for a trough soon, and a recovery by the latter part of 2008. I’m not sure I agree, as I feel the Fed is still locked into a high-inflation/low-rates scenario, and the average consumer can remain weary for a while once they get that way. But, we’ll see….

Anyway, here’s the actual economic data overview, and here’s the accompanying story.

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I swore to myself I would drop the subject after Tuesday’s rant about the rally Bernanke bought with a $200 billion auction/liquidity injection. Sometimes though - and thanks to Henry Paulson this time - the need for a reality check presents itself.

In short, I think the Fed Chairman and the Treasury Secretary need to talk to each other at least occasionally…especially when we’re being boinked around this pinball machine we’re calling a credit crunch.

Though this glosses over some detail, here’s my basic beef today….on Tuesday Bernanke made it easier for lenders to make loans; on Thursday, Paulson made it harder. Back to square one, though the market once again liked what they heard (even without really understanding what they heard).

I’m not going repeat my “Why, Bernanke?” speech again - just click here if you missed it. Then, come back to today’s Bernanke. Feel free to make yourself a drink before you do either though…you might need it.

Treasury Secretary Paulson unveiled 20 pages worth of recommendations today….recommendations for the lending industry to get themselves out of the mess they created for themselves (or us). He had help though - a bunch of help from Washington’s top minds (which may not be saying much).

If you want to read all the details, click here. Being the nice guy that I am, I’ve assembled the best of the worst highlights here. The quotes from the WSJ Online story are in quotes. (Brilliant, huh?) My responses are in bold and parenthesis. I have some final ranting to do once we’re through with the list.

• “Treasury Secretary Henry Paulson, unveiling a 20-page set of recommendations from the top-level President’s Working Group, blamed a “dramatic weakening” of underwriting standards for lower-quality home loans for helping trigger turmoil in credit markets.” (Oh - is that what it was?)
• “In a speech at the National Press Club, Paulson appealed to banks and other lenders not to stop issuing loans and implied they should cut back on dividends paid to shareholders if necessary to raise capital. “We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies.” (OK, lemme get this straight…banks are supposed to focus on making better loans, but are supposed to not stop lending? Furthermore, are lower dividends going to inspire investment in already-shaky stocks? Hope there were no IPOs planned in the arena.)
• “Paulson said state and local regulators need to toughen oversight of all mortgage originators. Sloppy lending practices including loans made to homeowners with no requirement of proof of income, are widely blamed for a soaring tide of foreclosures, especially among subprime mortgages held by people with the shakiest personal credit.” (Here’s an idea…don’t bail ‘em out. Cut the fat by attrition.)
• “Paulson said credit rating agencies need to make sure that securitized credit issuers — like those who issue mortgage-backed securities — “perform robust due diligence of originators of assets that are securitized or used as collateral for structured credit products.” (Isn’t that what they’re supposed to do in the first place? It’s a sad day when the government has to mandate common sense.)
• “The report said various government bodies had worked on the recommendations for more seven months and that Paulson and Federal Reserve Chairman Ben Bernanke had “huddled” for half a day early this month to review the details.” (LOL! It took a committee to determine all this? Moreover, it took seven months for the committee to write 20 pages of ‘don’t make dumb decisions’? I could have done that in about seven minutes. As far as Bernanke and Paulson chatting for half a day…a whole half a day to coordinate a nationwide government effort? Maybe that’s the issue right there.)

Final Thoughts

Don’t get me wrong - it’s not like Bernanke and Paulson are completely undermining each other….but their efforts aren’t exactly aligned. What kills me is how they both did nothing for so long, and now they’re tripping over each other trying to make a dent. We went from underkill to overkill in a span of three days.

I have to think they’re both fighting for their jobs now. If a Democrat (read ‘Obama’) gets in, I think you can kiss both Paulson and Bernanke goodbye at the earliest opportunity. They’re both about a year late to the party….in true Greenspan form.

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Bulls make money, bears make money, pigs get slaughtered. That’s why I suggest you go ahead and play defense again with the gold (or gold futures) trade we recommended waaaaayyyy back on December 24th. Gold futures reached $1000 today…about 22% above where they were back when we first mentioned the breakout. Though the near-term target - based on the Fibonacci extension level - was and is 1029.80, the chart’s starting to look a little over-extended. Better safe than sorry, especially when it comes to protecting profits. So…

Let’s scoot the stop level up from 951 (as suggested on March 3rd) to 962.50. That’s about the floor we saw for most of last week.

No matter what, if gold gets to 1029 before falling back to 962.50, take your profits then.

It’s so easy to follow the crowd when a stock or future is rising, but the best traders usually sell it when everybody else is clamoring for it. These same guys (or gals) are more than happy to buy what nobody else seems to want. What’s that got to do with anything? By the time we see trades at 1029, the hype could be huge, but the buyers could be completely tapped out. You don’t want to be left holding the bag when the bottom falls out; sell into strength.

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Please don’t ask me why footwear stocks like Nike (NKE), Deckers (DECK) and Skechers (SKX) were up so firmly on Wednesday when the market was moderately in the red - I don’t really know either. There were a whole slew of industries with gains I can’t quite figure out right now. In fact, there are a few industries I was surprised to see in the red.

Normally I can determine and even predict where the hot and cold sectors are within the stock market. Lately though, the market’s been throwing some interesting curve balls. Here are the notable wild pitches over the last month (and just for reference, the S&P 500 is down 2.9% for the last month):

Winners

• Biotech is up 1.5%. Not great, but a drastic turnaround for a group that was the first to fall a few weeks earlier.
• Industrial machines are up 1.5% for the last month as well, which doesn’t exactly scream recession.
• Computers, up 5.0% in the last month? Yeah, I double-checked it….these stocks have kicked a little butt, but….
• …they didn’t kick as much butt as office electronics stocks did, which are up 7.4% for the same timeframe.
• Tobacco stocks are up 2.8%. No surprise there - these stocks are the prototypical holdings in a bearish environment.
• Food stocks are up 2.0%. Ditto the tobacco comments.
• Water utility stocks gained a huge 10.8% over the last month. That’s the top performer among all the major industry groups. That’s a huge hint of a bear market as well. Did you know that during the last bear market, the average water stock gained as much as the NASDAQ lost?
• Energy and basic materials - metals in particular - have been the key strongholds for most portfolios, and both point to a bearish mood as well. Oil racing to nearly $110 per barrel didn’t hurt the cause either.

Losers

OK, most stocks and groups were losers; I’ll try and limit my listings to the significant ones.

• Packaging/paper stocks fell about 4.0%….a surprise, since they tend to benefit from a bear market like most other materials do.
• Electric utilities are lower by 18%, which pales in comparison to the 21% loss for gas utilities. So much for the safety of this sector.
• Automobile stocks are lower by 22% for the last month. This may not be your father’s Oldsmobile, but these auto stock prices look like the same prices your father paid for ‘em.
• Telecom’s down 13%.
• Financials are down an average of 8.5%, with banks and lenders leading the selloff. I’ll refrain from beating this dead horse any further.
• Healthcare providers are off by 14% in just the last month.
• Software stocks lost 10.8% last month. 

So What?

More and more I look for group strength (or weakness) as much as an individual stock opportunity. Maybe you can find something you hadn’t thought of in all of this mess.

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Undoubtedly by now you’ve heard how the Federal Reserve is going to supply $200 billion worth of Treasuries to the U.S. financial market, with the primary intent of spurring more borrowing activity. The move was designed to stave off continued shortages of cash within the lending market. In other words, it’s an injection of liquidity. In MY words, it’s another ineffective, b***s*** p.r. effort.

It’s amazing how quickly the market has forgotten something I discussed here in the blog (at great length) a mere two months ago….the Fed already tried this exact same thing. They put $40 billion worth of liquidity into the loan market in December. The Fed said it was “a creative way to try to get more cash into the system without marking anyone as being in trouble.” (a ’something for nothing’ mentality that terrifies me, coming from a Fed governer)

Did it work? Looks like it didn’t - things got even worse in January and February. So, the Fed’s multiplying the effort by a factor of five this time around.

Perhaps it’s just me, but maybe a lack of cash or liquidity ain’t the problem. You can throw all the money you want to at the perceived issue, and it won’t solve or fix what’s broken. What’s the problem? Nobody wants to borrow anything right now, whether they’re credit-worthy or not. And, banks could have tons of cash, but that’s not going to make an iota’s worth of difference in who they’re willing to lend to.

And on a side note, does anybody really think this is a consequence-free decision? Somebody will eventually be left holding the bag.

My bottom line is this…the more desperate the Fed acts, the more nervous I get. When they start inventing ways to drum up lending activity, I get downright scared. December’s parallel maneuver was a joke, and I don’t see how magnifying a joke makes things better.

By the way, I recall Alan Greenspan saying once he felt recessions could be completely avoided by careful operation of the Fed’s financial tools. I’ve never heard Bernanke say that, but I have to wonder if he thinks it.

Personally, I don’t feel cyclical recessions can be avoided, and I’m fine with that. What I’m not fine with is any Fed chairman trying to do something that’s just not likely….and spending my money to do it. Recessions and bear markets are just part of life. I hate ‘em, but I’m not naive enough to think they can be avoided.

Seems to me the Fed’s just throwing away good money after bad.

The market likes - no, loves - the news today anyway, but they loved it in December too. That lasted a whole two days.

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I know I promised this last Friday, but I wanted to wait until we got Friday’s closing data in place…it will make today’s explanation ten times more clear. What I’m taking about is my use of breadth and depth in determining when the market has had enough - and is likely to reverse.

Truthfully, I could write a small book on the subject. Maybe I’ll do that over time. For today I just want to focus on one of my favorite breadth-and-depth scenarios - too many new lows.

I’ve actually discussed this idea before, and used it to make a couple of big calls about market tops and bottoms (see June 21, 2006). That’s not to say it’s perfect, but it’s better than throwing darts.

In simplest timers, the market has a way hitting a bottom in a most painful way. When an exchange’s - usually the NASDAQ or NYSE - ‘new low’ reading gets excessive, we can start to look for a recovery move.

Defining ‘excessive’ is the trick. There’s no pre-set number…it’s all relative, and even changes from one exchange to another. In general, anything more than 200 new lows for the New York Stock Exchange was a sign of capitulation, while anything more than 300 new lows for the NASDAQ meant a bottom had likely been made. Like I said though, you have to adjust for all kinds of variables.

Early January was a good example of why you have to take it all with a grain of salt - we saw the NASDAQ hit new levels in the 500’s for several days, yet the market just kept on sinking.

In retrospect, I think it’s less effective in a bear market than a bull market. That’s why the struggle in January. Regardless, the tool is effective even if imprecise…you just have to know when to have blind faith, and when not to.

By the way, the inverse - using too many new highs to spot market tops - is only somewhat accurate. That’s not entirely a surprise, as the natural tendency for the market is to not make tops, yet make bottoms. However, I have a feeling the ‘too many new highs’ tool will work far better in a bear market than a bull market.

I’ll look at other breadth and depth tools in the future. This one seems the most time-sensitive in light of Friday’s and Monday’s action.

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As promised in yesterday’s newsletter, I want to document (and explain) how and why I use the ISE exchange’s sentiment index to spot instances where the stock market is likely to make a reversal. The predictive qualities of the sentiment index aren’t perfect, but they’re definitely helpful when other tools are unclear about a market trend’s longevity.

What is it? In a nutshell, the ISE Index measures broad bullishness or bearishness by calculating the ratio of how many puts (bearish) are traded on any given day versus how many calls (bullish) are traded on the same day. The ‘index’ is actually a call/put ratio of opened option positions - closing trades don’t count. (Don’t worry about the difference if you’re not familiar with options trading mechanics - it doesn’t affect the use of the tool.)

Why is it important? Most of the time, it’s not. Most of the time the call/put ratio is at or near an average reading. Every so often though, the ISE Sentiment Index gets crushed or spikes. Those are the instances I’m interested in.

A low call/put ratio means a lot more puts trade than calls, which indicates a great deal of fear or pessimism. A high call/put ratio suggests traders are bullish, since they’re more interested in bullish positions than bearish ones.

Here’s where it gets interesting though….I’m bearish when the ISE Index is swollen with bullish optimism. I’m bullish when the ISE Index shows an incredible amount of fear by plunging.

The philosophy is called contrarianism - taking the minority side of market opinion. The smaller the minority, the stronger my stance is against the majority.

Why? In my experience (though not just mine), the majority of the market is usually wrong at the worst time to be wrong. In other words, most investors are terrified right as stocks hit a low. And, most investors are ridiculously optimistic and bullish right as stocks are making a peak.

Most of you all know by now I assume nothing; many ‘obvious truths’ about stocks are just flat out wrong. The only reason I’ve bought into contrarian strategies is because they work - I’ve personally tested the theory and come up with my own evidence.

I’m not going to dive into the details of my work…I don’t need to. Just understand that the contrarian use of the ISE Sentiment Index has worked far more often for me than not.

On the chart below I’ve plotted the S&P 500 along with all the ISE Index data I had access to…back to early 2002. To spot the strong peaks and plunges in the ISE sentiment data, I wrapped them with Bollinger bands. When either of the Bollinger bands is touched, I know an extreme reading has been made. (Bear in mind that ‘extreme’ is always relative, which is why I like to use an adaptive tool like Bollinger bands.)

Each low and each high for the ISE Sentiment Index has been marked with an arrow, and a corresponding ‘buy’ or ’sell’ has been marked on the S&P 500 chart. The image tells the tale.

The tool is better suited at spotting bottoms than tops…a natural tendency during a bull market. I suspect the tool will do quite well at spotting the tops within a bear market. Even then, the peaks in the ISE Sentiment Index still spotted most instances where a strong rally was about to weaken.

Perfect? Nope - nothing is. However, I’d much rather have this information than not have it. I can see things with this data that don’t show up on the index charts alone…like the mis-timed fear and greed of the masses.

If you’d like to learn more, or follow the ISE Index for yourself, click here.

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