According to the Japan Robotics Association, the consumer robotics market is projected to reach 24 billion this year, and balloon to 66 billion by 2025. I personally think that the long term estimate is a bit pessimistic. Bill Gates is on record for predicting that robots will be as common as computers are today.

If he is even half right, investors that get in on promising techs today will be fantastically compensated for their vision and patience in the long run. Getting in on the next wave of robotics now will be like getting in on Intel, AMD, Apple, and Microsoft in the 1980s.

Of course, the Great Recession has dealt a few temporary blows. A mainstay of the robotics industry has been assembly line machines for the automobile manufacturers. But the robotics industry is diversifying, and the automotive industry itself gives a good example of what can happen.

While automobile sales plummeted during the Great Depression, crucial improvements in automotive technology like the fully automatic fluid transmissions and hydraulic brakes were being made that would revolutionize motoring once it was all over. Once that storm passed profits and sales went up, along with share prices.

Robots are already being used for dangerous jobs that humans would rather not do. The US Commerce Department decided to fund a project with Fibrwrap Construction Inc to develop robots that will be able to repair aging water transmission pipelines from the inside. The advantage of this method is that the infrastructure won’t have to be torn out of the ground to be repaired. But the robotics market is rapidly spreading beyond these types of dangerous applications…

Robotics is being aided by a simple economic fact: while cost of production for goods has generally declined over time, prices for services generally don’t fall quite as much. Consider that your computer costs a fraction for the performance you receive compared to two decades ago, but the technician that repairs it has generally remained quite expensive to hire.

Food prices, to give another example, have fallen steeply in real terms over the last century. This is not only due to better agricultural techniques, but also because of increased automation. From John Deere and Alice-Chalmers, from the balers to combines, mechanized agricultural equipment has drastically reduced what we have to pay to consume our daily bread. Robotics will be no different, and we are on the cusp of big changes.

In our day and age, the healthcare service industry has proven highly resistant to price declines partly because of labor costs. Improved robotic automation is one of the fastest ways to increase productivity and reduce labor costs. With the leading edge of the Boomer generation entering retirement, there will be huge financial incentives for improved robots. There will be tremendous demand for anyone that can build an affordable robot that can help with housekeeping and basic care.

Families that want to keep older members out of assisted care facilities and closer to home will look to robots for help.

I spoke with Martin Spencer, President of GeckoSystems International Corp regarding his vision for robot assisted health care. Having spent over a decade working on his dream of a personal care robot, his company has developed unique technology that is starting to demonstrate its usefulness in marketable models.

According to Spencer, the hardest problems related to robotics in this role are software and AI related, not hardware related.

Their flagship robot, called CareBot, has advanced modular artificial intelligence and a proprietary compounded sensor system that allows it to reliably move about the typical home landscape. Unlike other robot designs that seek to reduce sensor inputs to cut down on processing overhead, GeckoSystems’ CareBot is sensor loving. This property is necessary if a viable multipurpose self-directed robot is to become successful. The main reason is because multiple inputs help to give the robot a better reading on its environment. For example, when you are driving a car, you not only receive inputs through your vision, but also through the sensing of acceleration or deceleration, engine vibration, a honk from a nearby car, or the bump of a collision. Being able to use multiple sensor feeds is particularly important in a robot that needs to move about the home on its own.

The CareBot also has an AI module that is designed for human/robot interactions. This module, called GeckoChat, can respond to voice requests, create voice reminders, and even engage in word games with a human being. The beauty of GeckoSystems’ AI platform is that it can run on common PC hardware and operating systems like Windows XP and Linux, keeping down costs. Spencer estimates that the CareBot can pay for itself in a matter of months, due to the high cost of assisted care.

Along with my colleague Patrick Cox, I am closely investigating advancements such as CareBot, along with other opportunities in this space. These life-changing technologies will become commercialized sooner than you may think.

Ad lucrum per scientia (toward wealth through science),

Ray Blanco
for The Penny Sleuth

Robotics and Health Care: A New Growth Market was originally featured in the Penny Sleuth.

But before I reveal my screen criteria, I want to show you why I believe we’re entering an important moment for small stock investors…

Right now, the market is beginning a powerful underground rally, boosting small-cap stocks close to their pre-correction highs. The Russell 2000 is up more than 11% year-to-date, easily topping large-caps in the S&P 500 and the Dow.

Small-caps are winning the race right now because they are the most potent stocks to own during the early stages of a rally. As you probably know, investors see small-caps as riskier investments. That’s why they are the first to be sold off after a long bull market.

But small-caps are also the first stocks to rise once the market has bottomed out. The rush to get back into smaller names pushes these same stocks up farther and faster than their larger counterparts.

Even though small-caps are outperforming the S&P 500 and the Dow so far this year, we haven’t seen a watershed buying moment just yet. That’s why I’m still calling this an “underground” rally. But with every passing day, I think we’re getting closer to that powerful breakout. All that’s left to do is to coax investors on the sidelines back into small stocks.

Retail investors have pulled almost $18 billion out of small-cap funds over the 36 of the last 39 weeks, according to data from J.P. Morgan. This shows us that a great deal of Main Street’s money is still in cash, waiting until the investing waters are declared safe before buying smaller stocks. All we need is volatility to remain low and the market to remain stable for these market watchers to dive back into stocks.

That’s where my 3-part screen comes into play. Follow these easy steps, and you will be able to track down the small stocks that are the best candidates to beat the market. If you do it today, you’ll even have the chance to get in on these names before the next leg of the rally begins to take off…

To begin, go to your favorite free financial website. Google Finance, Yahoo or any of the other major sites will do. If you want a more comprehensive list of screening tools, just search for “stock screeners” online. There are plenty of viable options out there. You don’t even need a subscription or any special software.

[Editor’s note: For a more in-depth piece on free stock screening sites, click here.]

Now you’re ready to begin your search.

1. First, drill down to the most viable sectors: Right now, the investing environment is most suited for consumer stocks, tech names, and pharmaceuticals. These are the types of small-cap stocks that are looking strong right now. Get rid of stocks in the utilities, energy and financial sectors. These are the names that aren’t showing strong earnings or growth at the moment. There’s no point in wasting your time sifting through stocks in a lagging sector. Cut them, and move on.

Setting up the screen is simple. Just adjust your market cap parameters to find stocks in the $300 million – $2 billion range. Then you can enter your sector of choice…

2. Find the profitable companies trading at a low price-to-earnings ratio: The next metric you need to add is price-to-earnings ratio. Investing in companies that are cheap compared to how much money they are earning is a great way to prepare for a rally. Filtering out stocks with P/E ratios higher than 15 is the perfect way to narrow your search. When stocks are moving higher, bargain hunters will swoop in and bid up these “cheap stocks” to more reasonable levels.

Now that you’ve added this second key metric, you can begin searching your selected sectors for cheap plays. Make a list of all the companies that interest you. Now you’re ready for the final step…

3. Finally, select the stocks with the most momentum potential: Your final step involves some quick chart analysis. But don’t worry—you do not have to be seasoned market technician to complete this task. Simply take your list and look at each company’s daily chart. Then ask yourself one simple question: What is the primary direction of this stock?

There are three answers to this question: up, down, and sideways. Get rid of any stock that looks like it is moving lower. That will leave you with names that have bottomed out and are moving sideways, and stocks that are moving higher. As you narrow your list, you can use these charts to separate your best ideas. If you have two stocks you really like, compare charts. Unless you have a compelling reason to pick one name over another, I would recommend going with the stock in an uptrend every time.

Here are a couple of examples I found after searching for only 10 minutes:

Iconix Brand Group Inc. (NASDAQ:ICON): Iconix owns a large portfolio of apparel brands. Its P/E comes in at about 13, and the company has proven it can steadily increase its sales and earnings. The stock has also moved steadily higher since it bottomed in early October.

Greatbatch Inc. (NYSE:GB): Greatbach is in the medical device sector. Its P/E comes in at 14. The stock is also only slightly above sales—another sign of a cheap name. GB is also recovering from last year’s slump. Shares are quickly approaching pre-correction highs.

Of course, this lightning-fast analysis just scratches the surface of these two companies. Still, you can see how a quick search yielded two strong possible investments.

Sincerely,

Greg Guenthner
for The Penny Sleuth

3 Keys to Playing the Underground Small-cap Rally was originally featured in the Penny Sleuth.

It’s the rule that every successful investor has used to build wealth. And it’s the same rule that will destroy your trading account if you fail to heed its warning.

That’s why I want to alert you to a group of stocks that could cause you a lot of unnecessary pain this year. I’m talking about the so-called social gaming sector — specifically Zynga Inc. (NASDAQ:ZNGA) — the developer of FarmVille and other fad games for Facebook and mobile phones.

It all comes down to unrealistic expectations. I saw this same story play out last year when OpenTable Inc. (NASDAQ:OPEN) and Green Mountain Coffee Roasters (NASDAQ:GMCR). Both lost more than half their market value after failing to meet outrageous growth projections. The same fate awaits Zynga. If you invest in this stock expecting a huge payout by next year, you could be in for a terrible surprise.

Here’s why you need to avoid this stock — and the entire social gaming sector…

Since Facebook formally submitted its IPO paperwork last week, analysts and investors have been buzzing about Zynga’s growth prospects, bidding the stock up nearly 40% in a little more than a week. But I don’t see this growth story playing out much longer without a serious correction.

Unfortunately, countless eager investors will probably get sucked into this stock before it crumbles. It will begin next week when Zynga will announce fantastic earnings. The company will beat estimates, predict incredible growth and win over plenty of new followers. Yet despite the hype, Zynga will eventually disappoint anyone who buys this stock right now. In fact, the entire social gaming sector is a sham. And it will quickly unravel once investors realize Zynga and its peers can’t live up to the lofty expectations…

Of course, this hasn’t stopped the financial media from highlighting some gaudy numbers. Analysts have even reverse engineered Facebook’s recent IPO filing to predict Zynga’s performance. Since Facebook reported that Zynga was responsible for 12% of its revenue, it’s easy to see that its game sales were worth $450 million to the social networking giant last year. One analyst who dissected the report even raised his fourth quarter revenue forecast for Zynga to $315 million from $300 million…

That’s a considerable amount of money. However, I don’t think the good times will last.

There are simply too many factors working against Zynga and the social gaming sector. Just because of the nature of the business, it will be incredibly difficult for Zynga to protect its current position at the top of the industry. Simply put, there’s nothing standing in the way of a garage-based start-up from destroying Zynga’s market share. It doesn’t take tens of millions of dollars to put together a game development operation and release a title.

Innovative start-ups could quickly pose major problems…

These pesky start-ups aren’t the only threat. Established video game companies are also fighting for their piece of the social gaming pie. Even video game giant Electronic Arts Inc. (NASDAQ:EA) has emerged as a Zynga competitor. As if we needed more proof that the EA threat is very real, Zynga went on the offensive last month and hired away the head of EA’s interactive division. This is the kind of poaching I expect from this sector. In the end, none of these firms will walk away with enough of an advantage to be a staying force in the industry. In the long run, they will continue to cannibalize sales from one another, leaving no possible way for the average investor to capitalize.

Furthermore, games that are popular now won’t stay popular forever. I do not believe social gamers are going to be loyal to one game developer or another. They will play the “hottest” game at any given moment, and then move on to the next-best title once it becomes available. Zynga is bound to miss the mark with one of its upcoming games. That’s all it will take for investors to head for the exits. Just one mediocre launch that falls short of expectations will send the stock into a tailspin…

Right now, analysts are betting big on Zynga’s foray into gambling-related games. But I’m not willing to take these odds. I’m seeing better opportunities (with far less risk) elsewhere in this market. I’ll highlight some of these soon. For now, steer clear of Zynga and social gaming. As investments, these stocks just don’t make a whole lot of sense.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Why You Should Avoid Zynga and the Sham “Social Gaming” Sector was originally featured in the Penny Sleuth.

In scientific circles, this type of anecdotal evidence, no matter how persuasive, cannot be relied on or cited. Those are the rules, even if they’re regularly broken.

Economists and analysts, however, have different rules. We make predictions that scientists cannot make, at least publicly…

I predicted that further research would prove that this substance citrate is one of the most important breakthroughs in modern medicine. This is because I am convinced of its ability to halt or ameliorate the underlying mechanisms of autoimmune disorders, in part at least from personal experience.

Therefore, I am enormously gratified to see the first clinical data validate my assumptions and predictions. We don’t yet have multiple double-blind studies, but first published results are, in a word, stunning.

Data was just released regarding this substance’s impact on hs-CRP (high-sensitivity C-reactive proteins).

CRP levels, as you know, are strong indicators of various medical conditions as well as general health. High CRP levels are associated with increased risk of diseases ranging from heart disease to cancers.

The bottom line is that low doses of this substance dropped highly sensitive C-reactive protein levels by about a third in test group of mostly obese smokers. Because reductions in CRP levels have the most impact on health when they are high, these reductions are extremely meaningful.

Though it is not blinded data, it is still extremely meaningful. We already knew, from animal and cell studies, that this substance outperformed other anti-inflammatories ranging from Lipitor, aspirin and ibuprofen to Celebrex.

Until now there had been no clinical evidence that this substance works as well in human studies as it does in cell and animal studies. This is, therefore, an important point in the history of this technology…

Remember, numerous studies link statin use to reduced risk of heart and other diseases. Others believe that inflammation is the driver behind most cancers.

When all is said and done, I believe the impact of widespread use of this substance will have a profound impact on our demography as well as investors’ bank accounts…

Yours for transformational profits,

Patrick Cox
for The Penny Sleuth

One of the Most Important Breakthroughs in Modern Medicine was originally featured in the Penny Sleuth.

With the New York Giants’ win fresh in the minds of 111 million Super Bowl viewers, I guess it shouldn’t come as a huge surprise that a slew of financial media outlets are talking about the “Super Bowl Indicator”.

Here’s a bit from the Wall Street Journal:

Robert Stovall of Wood Asset Management in Sarasota, Fla., is the veteran market analyst who has popularized the [Super Bowl Indicator].

“I don’t have any particular expertise in predicting the outcome of sports events,” says the 85-year-old Mr. Stovall, but he nonetheless leans toward a Patriots win, which would mean a down year for the market. “But if the Giants win, a happy feeling should spread through the bulls.”

The so-called “Super Bowl Indicator” predicts that if an NFC team wins the Super Bowl, the stock market will have a bullish year. On the other hand, an AFC Super Bowl victory predicts a bearish year for stocks. In the last 41 years, the Super Bowl Indicator has had an 80% success rate in determining the market’s direction. The Giants’ win, then, should foretell of a bullish year for stocks. So, should you believe it?

Absolutely not…

There are some major holes in the story behind the Super Bowl Indicator (SBI) — ones that may not be readily apparent to most investors. After all, they weren’t apparent to the Wall Street Journal, the Indianapolis Star, Forbes, or scores of other major media outlets that have been gushing about this false prophet for stock performance.

When it comes to the Super Bowl Indicator, it’s important for you to realize that “correlation doesn’t imply causation”. In other words, just because there’s a correlation between two things doesn’t mean that there’s a causal link between them. Just because your cell phone stops working after a power outage doesn’t mean that the outage broke your phone. In the investing world, that’s one of the most important concepts to understand…

And just because there’s no logical link between Super Bowl winners and market performance doesn’t mean that there’s no complex relationship at play. Just because a high correlation doesn’t prove they’re connected doesn’t mean that they’re not.

Incredibly successful traders have been known to look for bizarre links between outside factors in the market. Billionaire hedge fund manager Jim Simons even admitted once that his firm researched connections between sunspots and market performance — but he wouldn’t tip his hand as to what they found out…

So, with an 80% success rate, why is the SBI a bunch of bunk?

Well, the first thing to look at is the possibility that that 80% win rate was due to luck or chance — in other words, is that rate statistically significant?

On the surface, it looks that way. With 41 games played and measured against the following year’s performance, the statistical chance of an 80% correlation being luck is infinitesimally small. But — and here’s the clincher — the SBI doesn’t follow a normal distribution. Put in plain English, there’s a very logical reason why it’s garbage…

You see, historically, the stock market has been trending higher. As a result, we’ve had more up years in history than we’ve had down years — so it’s statistically more likely for any random year in the last 41 years to be a positive year. Now, let’s look at the NFL.

Like stock market performance, the winning conference in the NFL is hardly random. Thanks to a long NFC winning streak between the 1980s and the late 1990s (in part the result of the dominance of the Dallas Cowboys and the San Francisco 49ers franchises during that time period), NFC teams have won more Super Bowl match ups than their AFC rivals. As a result, it’s statistically more likely for any randomly chosen Super Bowl year to have an NFC winner just because a couple of dynastic teams happened to be in the NFC.

When you put those two statistics together, it’s more likely that a year will be up than down, and it’s more likely that the Super Bowl winning team would have been in the NFC than the AFC. So the high correlation between up years and NFC wins isn’t a huge surprise after all…

The fact that the SBI is worthless hasn’t kept otherwise smart people from touting the usefulness of the metric. A professor at Washington & Lee University even went as far as developing an investment strategy that selects different asset classes depending on the winning team of the big game.

“When I present this you can see the smile on their faces ‘You’re not serious are you?’,” says the prof…

Of course, even the good professor hasn’t invested his own money in the Super Bowl Indicator strategy. In fact, of all of the mainstream cheering of the SBI, there wasn’t a single person who actually said that they invested real money based on the indicator — only those who “wished they did.”

That may be the biggest red flag of all — if an indicator’s biggest fans aren’t putting their cash on the line with it, neither should you.

The old joke goes that 68% of statistics are made up. Well, if the Super Bowl Indicator proves anything, it’s that even compelling statistics can be misleading when they’re not approached with mathematical rigor. Regardless of which team you were cheering for last night, do yourself a favor and avoid the indicator everyone’s talking about today.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

Debunking the Super Bowl Indicator was originally featured in the Penny Sleuth.

We should continue to expect this tug-of-war between bulls and bears to continue for a while as the market approaches important areas of resistance. The emotional game has to play out — and you’ll have to wait and see what side wins over the hearts and minds of the market and its many participants.

Simply put, it is dangerous to “take sides” this early in a trend. For instance, traders were buying stock early this week as if it were their last day on Earth. Unfortunately, the buying didn’t stick, and most stocks have found lower ground. Expectations went from bullish euphoria to an almost unanimous consensus that a pullback was in order in just a few days.

None of this back-and-forth action is cause for alarm. Stocks have been climbing steadily for weeks now, so we will eventually need to see some sort of correction. This can happen one of two ways — through price or time. While there is no way to say for sure how the market will digest its strong start to the year, it appears that stocks want to churn sideways for a bit.

For now, a sideways market makes sense. Despite the strong start to 2012, I do not believe the investing public is getting too greedy at this point. But it is fairly evident that at least some level of comfort is returning to the markets. So we’ll walk the tightrope of fear while the major indexes sneak toward important areas of resistance. That’s where things will get interesting…

The Dow is already extremely close to matching its 2011 highs — and the S&P isn’t far behind. Here’s a weekly look at both indexes, with areas of resistance marked with dotted blue lines:

How investors react to these key levels will determine the strength of the rally over the next few weeks. Obviously, a clean break of the previous highs will help put the past 6 months behind us. With clear skies ahead, we should see additional interest in smaller stocks — and more trading opportunites in the small-cap and microcap universe.

What’s important right now is to train yourself to be able to see the forest through the trees. So many traders get hung up on the day-to-day movements of the market, letting their emotions get swept back and forth with every high and low. Micro-analysis like this can lead to chasing stocks, bad entries and exits, and losses. But even more importantly, if you let the tiny movements of the market get in your head — especially duing important turning points in trend — you’ll risk missing the bigger move entirely.

Sincerely,

Greg Guenthner
for The Penny Sleuth

Don’t Get Trapped By Sideways Stocks was originally featured in the Penny Sleuth.

Joel Greenblatt wrote about it in his 1997 book You Can Be a Stock Market Genius. Greenblatt, at that time, was a relative unknown. But his Gotham Capital had put up 50% average annual returns for 10 years. The book had a big impact on how I think about investing.

What are we talking about? Spinoffs…

A spinoff is simply when one company takes a part of its business and makes a formal separation with the parent company by creating a new, free-standing company.

You don’t have to own the parent to the get spinoff. It’s just that the shareholders of the parent get the shares automatically. You can pick up shares after a spinoff.

Spinoffs as a group have a tendency to beat the market. There have been a number of studies on this point. The most famous might be a Penn State study that showed spinoffs outperformed the market by about 10% per year in the first three years of independence.

That’s a huge edge!

Why does this happen? I think the best explanation is simply rooted in the nature of business. When a smaller group is freed from the parent, there are creative and entrepreneurial energies released as well. There is a management team that can now focus on the spun-out assets alone, without worrying about what the parent thinks or needs. There is some benefit from this focus and freedom.

So spinoffs are one of those pools of investing ideas I routinely fish in for new ideas. The amazing thing is that despite all the publicity and studies, the anomaly persists! Why? Well, as Greenblatt says, it’s practically built into the system. “The spinoff process is a fundamentally inefficient method of distributing stock to the wrong people.”

After all, people didn’t ask to invest in the spinoff. They didn’t choose to buy the shares. They bought shares of the parent, not the spinoff, which were given to them. So they tend to sell the spinoff. This is what usually happens. And all that selling pressure drives down the shares.

The spinoff, too, is usually a small piece of the parent — maybe 10%, often less. So if you have $10,000 in a stock, you get maybe $500 of this other stock. Rather than bother with it, you just sell it. Institutions do this, too. Instead of spending resources trying to figure out this new thing, they just get rid of it.

As Greenblatt writes: “Does this practice seem foolish? Yes. Understandable? Sort of. Is it an opportunity for you to pick up some low-priced shares? Definitely.”

Why do a spinoff at all then? Each case is different. Sometimes it is a way to get rid of a business that is tough to sell on its own. Tax reasons might enter into it. Or it might solve some other strategic objective. The most-common reason is to create shareholder value with greater transparency. The hope is that the market might appreciate the separate businesses more fully.

One example is General Growth Properties. Spinning out Howard Hughes was a way to package all of its development assets into one company so it could focus purely on running malls. Howard Hughes owns a hodgepodge of planned communities and things unrelated to malls. As a separate company, Howard Hughes can devote its full attention to its development assets. It’s a win-win.

Greenblatt offers a simple three-point checklist to search for winners. Howard Hughes met all three:

• “Institutions don’t want it.” I can tell you there was no interest in Howard Hughes from institutions. Even now, there is little interest in the company. It still has no Wall Street coverage, for instance. It doesn’t fit it any of Wall Street’s boxes. It’s a hodgepodge of real estate with uncertain cash flows, neither fish nor fowl.

• “Insiders want it.” By contrast, insiders loved Howard Hughes. They bought shares. Brookfield was among the big investors here and still owns 6% of the stock today.

• “A previously hidden investment opportunity is created or revealed.” Buried in GGP, Howard Hughes assets could easily be ignored and overlooked. But on its own, with attention and capital, Howard Hughes can advance projects and unleash their potential.

Howard Hughes traded independently on Nov. 10, 2010. It went down after the first week of trading. But by April 2011, it had nearly doubled. Even if you had held the shares from the spinoff to now, you’d be up 25%, versus 5% for the market as a whole.

That’s why you should always pay attention to spinoffs…

Sincerely,

Chris Mayer
for The Penny Sleuth

3 Easy Steps to an Unusual Investment “Guarantee” was originally featured in the Penny Sleuth.

Often, the momentum can be traced back to an obvious catalyst — fundamental improvements within the group or a well-publicized buyout in the sector. But sometimes, investors and traders trigger a furious rally pinned on nothing but the simple fact that a stock has started to move in their favor. The buying triggers even more buying — and the rally begins to feed off itself.

I’ve chronicled several interesting rallies over the past few years, ranging from coffee stocks (slightly absurd) to semiconductors (a great cyclical growth story). Eventually, these rallies run their course, and momentum traders move on to the next best thing. That might be happening right now to “The Great Pizza Rally of 2011-12.”

This pizza rally has been interesting for a couple of reasons. First, it has been largely contained within a subsection of the fast-food industry that would rarely be classified as a growth market. Also, I can see how a buyer might justify the rally in his mind. After all, the economy isn’t in great shape, so the average family might be buying more pizza. It’s a weak argument, but it makes sense to those who don’t trade using technical indicators. It’s tangible, easy to understand and act upon, and reinforced by the media.

Today, we’ll take a look at a couple of pizza players — and a few other high-flying stocks — and try to predict what the future holds for each…

Pizza Inn Inc. (NASDAQ:PZZI): This small pizza chain saw a big rally in its stock, taking shares from $3.50 in October to almost $7 by the beginning of December. Now, it looks as if the stock is stuck in the $5.50 range and possibly heading lower. The sharp uptrend that began in the fall is broken, so you shouldn’t expect more upside from this name anytime soon:

Domino’s Pizza Inc. (NYSE:DPZ): The king of pizza delivery is showing us a very similar pattern. Once again, we have a nice fall rally, lifting shares from $26 to $35 in a matter of weeks. However, 2012 has not been as kind to Domino’s. While the broad market has rallied to post-correction highs, DPZ has fallen out of favor. You can clearly see the trendline break right at the beginning of January:

BroadVision Inc. (NASDAQ:BVSN): After failing to catch a bid for most of 2011, BVSN proves that you don’t need a reason for an unannounced, triple-digit rally. This unheralded microcap started the month as a $10 stock, only to top $44 by yesterday afternoon. Not bad for a few weeks work — and absolutely no news other than the sheer power of the rally itself.

But that’s the thing with moves like this: they have to end eventually. And when they do, look out below. Check out the chart below for a very clear picture of what an unsustainable rally looks like. You should expect further downside action from here:

Apple Inc. (NASDAQ:AAPL): Finally, we turn to last night’s earning surprise from Apple. Even without vaunted leader Steve Jobs at the helm, Apple reported record earnings on stronger than expected iPhone sales. Spurred on by a 6% move this morning, Apple once again overtakes Exxon Mobile Corp. as the biggest company trading on the U.S. markets, with a market cap approaching $417 billion:

Sincerely,

Greg Guenthner
for The Penny Sleuth

Today’s Market Movers: AAPL, BVSN, and the Great Pizza Rally was originally featured in the Penny Sleuth.

The SEC and the IRS are only the beginning of the story…

In the United States, the Food and Drug Administration determines what can legally be sold. It even exercises control over what can be said by companies about medical therapies. Elsewhere, other regulatory authorities play similar roles.

It was not always that way, of course. Prior to the 20th century, there was virtually no regulation of medical therapies. Medical decisions were considered the domain of doctors and patients, who bore the responsibilities and risks associated with the use of any product. Even currently banned Class A drugs used for recreational purposes were available for sale without limitations.

Today, the average cost of bringing a medical product from conception to market is around $400 million, according to The Cato Institute. The time required can be as long as 10 years.

As a result, the FDA is widely considered in need of major reform, though the nature of those reforms is a matter of debate. Responding to criticisms, the FDA has implemented some programs to accelerate review procedures.

For example, Big Pharma is allowed to directly pay the costs of the process in some cases, which can result in a faster ruling. The FDA’s response to criticisms has often focused on the need for more money to accelerate reviews. Given budgetary pressures created by the financial and entitlement crises, this is unlikely. The FDA’s desire to expand oversight is, therefore, not likely to be accomplished, in the near term at least.

The FDA currently controls only the initial approval of a therapy. It does not prohibit the use of approved therapies for uses other than which they were approved, though many in the agency would clearly like to take over what is a far-less-regulated market than many believe. These unapproved, but legal, uses are referred to as off-label.

Currently, biotechs typically target applications with the highest probability of approval, knowing that a drug or device will be widely used for unapproved purposes as soon as it is available for sale. However, the FDA prohibits the advertising of uses other than those for which a therapy was approved.

The FDA has also become very aggressive policing the publication of unapproved medical information by companies that do not sell drugs. Recently, for example, the FDA sent Diamond Foods a letter stating, “your walnut products are drugs,” because the company had publicized well-documented research about the benefits of omega-3 fatty acids found in walnuts. Diamond was threatened with “seizure” if the company did not immediately stop educating the public to the benefits of walnuts.

The move is rife with irony, as the National Institutes of Health has lagged decades behind nutritional researchers regarding fats in general. For many years, the federal government officially endorsed the old, simplistic food-pyramid philosophy based on the notion that all fat consumption should be reduced. Researchers have shown, overwhelmingly, that most people are deficient in certain essential fats… especially omega-3s, which play an important role in reducing heart disease and other diseases.

Many consumers don’t have that understanding and could benefit from it, but the FDA frequently prevents companies from talking about the benefits of their products. This, by the way, is an example of what my dietitian wife calls regulatory “information hoarding.”

Diamond Foods, of course, quickly complied with the FDA’s ban on unapproved educational activities. However, the event highlights the tension between the agency and providers of natural products that may have health benefits.

This tension was codified in the Dietary Supplement Health and Education Act of 1994 (DSHEA). Sponsored by Sens. Tom Harkin (D-Iowa) and Orrin Hatch (R-Utah), the law specifically excludes naturally occurring substances, sold as dietary supplements, from the FDA approval process.

This was, in a sense, the birth of the modern American nutraceutical industry. Combining the words “nutrition” and “pharmaceutical,” nutraceuticals are foods or substances derived from foods, either synthesized or purified, and sold for health benefits. In Japan, the nutraceutical market emerged in the 1980s. Today, almost half of all Japanese consume nutraceutical products. The U.S., however, is catching up. Drug and health food stores have long stocked a wide range of nutraceuticals.

Increasingly, even grocery stores dedicate shelf space to natural products ranging from natural vitamin supplements to electrolyte-rich sports drinks.

Furthermore, we are also seeing nutraceuticals increasingly appear in foods to promote good health. Many foods are now being fortified with health-promoting ingredients. These include cereals with added omega-3 fatty acids, fruit juices with herbal ingredients that have biochemical properties and milk with vitamin D.

Even more esoteric products are sold in GNC and sports-oriented supplement stores. While many products may have little or no real value, it’s also clear that some have powerful biological effects.

One such product is creatine, 2-(methylguanidino) ethanoic acid. Creatine is a nitrogenous organic acid that occurs naturally in vertebrates, thus qualifying the product for nutraceutical status. It helps supply energy to all cells in the body, though most users are probably primarily interested in its effects on muscle cells…

Creatine increases the formation of adenosine triphosphate, which transports chemical energy within cells. The result for many, especially those who do not eat a great deal of meat, is increased muscle mass and anaerobic strength. For that reason, creatine is widely and legally used as a supplement by athletes who rely on strength, as opposed to aerobic abilities.

Creatine is the subject of scientific inquiry for other reasons as well. There is some evidence that it assists in muscle-damage repair experienced during intense training. One study has demonstrated increased cognitive abilities in humans, and animal studies point to potential in the treatment of ALS and Huntington’s disease. Some people are taking creatine for those reasons, but because it is a nutraceutical, manufacturers cannot publish any such possible benefits. To get permission to do so would cost many millions of dollars.

Today, the U.S. nutraceutical market is worth approximately $87 billion in sales, but is expanding rapidly.

There are many reasons for this growth.

In part, the nutraceutical movement is an expression of the widespread desire to take control and responsibility for one’s own health in an increasingly impersonal and bureaucratized health care system. As such, the current state of the nutraceutical industry is very similar to the pharmaceutical market in the 22-year period between the institution of the Pure Food and Drug Act of 1906 and the Food, Drug and Cosmetic Act of 1938. Government can monitor for purity and certain aspects of commercial speech, but not much else. Though this was not planned, this minimal regulation has actually increased public confidence in nutraceuticals.

Moreover, public perception of nutraceuticals is changing as more and more validated therapies appear. This is certainly my experience. Not that long ago, the health food store industry offered little of real benefit except basic dietary nutrients. More often than not, natural products were ineffective placebos at best, and harmful at worst. This has changed, and this change will accelerate for one reason — exponential growth in science, powered in large part by rapid improvements in information technology.

Given the frustrations of those who feel, often rightly, that they have been prevented from bringing important drug therapies to market because of onerous regulatory hurdles, it was predictable that many innovators and entrepreneurs would turn to nutraceuticals as an avenue of exploration. In this endeavor, there have been notable successes that have changed the face of biotech.

Serious scientists are applying the latest and most-sophisticated technologies to the uncountable natural molecules that exist in our biosphere.

Bioinformatics, molecular biology and nutrigenomics are contributing to this new field outside the bureaucratic hand of the regulators — with all the opportunities and risks that it implies. You do not want to ignore companies best positioned to profit from this disruptive revolution…

Yours for transformational profits,

Patrick Cox
for The Penny Sleuth

Invest In This Emerging Multibillion-Dollar Market was originally featured in the Penny Sleuth.

But it doesn’t have to be that way…

Today, I’d like to show you four simple chart patterns that could help you find your next profitable trade in 2012.

In his book, The Definitive Guide to Point and Figure, Jeremy du Plessis argues that:

“Some authors go on to list tables of patterns, but the need to learn patterns indicates a lack of true understanding of how a pattern is created. There is no point in trying to learn dozens of patterns; it is better to understand what causes them.”

As a market technician, that’s one of my favorite quotes. When it comes to chart patterns, it’s absolutely true that rote memorization will only get you so far. Instead, it pays (literally) to understand how and why patterns are created.

At their most simple construction, patterns are just different arrangements of support, resistance, and trend lines. While I won’t get into too much detail over how those individual building blocks work, you should be able to see a lot in common with the four patterns I’m about to show you. So, rather than trying to memorize the pattern on these four formations, memorize the combination of support, resistance, and trendlines that combine to create them…

1. Ascending Triangle

First up is the ascending triangle, a bullish pattern that’s formed by a horizontal resistance level to the upside, and uptrending support below shares. Those two technical levels form a shape that resembled a right triangle. As shares bounce in between them, they get squeezed closer and closer to a breakout above that resistance level. When the breakout happens, it’s a strong buy signal for shares.

The bearish opposite of the ascending triangle is a descending triangle. In a descending triangle, shares have horizontal support and downtrending resistance. The shorting signal comes when that horizontal support level gets broken.

2. Head and Shoulders

One of the most well-known technical formations is the head and shoulders top. It’s a bearish pattern that’s identified by a peak (the head), with smaller peaks on each side (the shoulders). Even though the head-and-shoulders is likely the most well known technical pattern, it’s still a valuable one: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”

On the opposite side is the inverse head and shoulders, which, as the name implies, is just a flipped version of the head and shoulders top. It’s a bullish pattern.

In both cases, the trade signal comes when shares push through the neckline (sometimes called “shoulder level”) in the chart above.

3. Consolidation

A consolidation channel (sometimes called an “If/Then Trade”) is a channel that’s bounded by both a horizontal resistance level and a horizontal support level. Frequently, consolidation channels come after large moves. They’re an opportunity for a stock to bleed off some volatility and for traders to think about their next moves. Unlike the other patterns we’ve looked at, this setup doesn’t have any directional bias until it triggers.

The trigger happens when shares push outside of the channel. When that happens, the high probability move is to take a position in the direction of the breakout.

4. Double Top

Finally, we’ll look at the double top; as the name implies, it’s a topping pattern (thus it’s bearish). The double top can be identified by two swing highs that peak at approximately the same price level — that price level is a strong resistance level, above which there’s a glut of supply of shares that overwhelms buying pressure. A double top becomes a short signal when shares push through the intermediate trough that separates the tops.

Not surprisingly, a pattern called a double bottom is the bullish opposite of the double top.

While we’re hardly taking an exhaustive look at all of the potential patterns that you may encounter in the market, these four patterns provide a good sample of how the building blocks of support, resistance, and trend create actionable patterns. By keeping these four patterns in mind the next time you look at a chart, you’ll be better able to spot other, more unconventional setups than traders who resort to rote memorization.

Happy trading in 2012,

Jonas Elmerraji
for The Penny Sleuth

Learn These 4 Profitable Chart Patterns was originally featured in the Penny Sleuth.