What if you could turn on your computer and immediately know where the market was headed a month – or even a year – down the road?

Though that sounds like science fiction, it’s actually not that far from reality thanks to the latest addition to our investing arsenal. It’s one of the most powerful investing tools that we have at our disposal… And after months of research, development, and testing, it’s finally ready to be put to work.

More importantly, I can finally share it with you.

But first, let me give you some background…

Historically, penny stocks lead the stock market out of recession. “…from 1943 to 2007, according to one analyst, small companies outperformed large companies by more than 50 percentage points in the three years following a recession, including the one following 2001,” explains Ken Kurson in an article published on Esquire.com last week.

That fact in mind, Penny Stock Fortunes editors Greg Guenthner, Jim Nelson, and I set out to create a tool that uses cold, hard numbers to point us toward recovery – and profits.

And while we only set out to predict the start of recovery, we’ve found that our tool is far more robust than that.

With it, we will be able to better gauge where the market’s going in the medium term and position ourselves accordingly. We’ll be able to see which industries will recover first – and we’ll be able to get into them before the rest of the market shows signs of a move.

Ultimately, this tool will point us toward the investments that have the biggest profit potential right when they’re ready to take off. I’m guessing you’re ready to hear exactly what this tool is…

I’m talking about our small-cap recovery index.

This project is a complicated one. It involves the selection of hundreds of stocks and additional metrics – like unemployment and savings rates. Once these benchmarks are selected and compiled, we will begin to see a picture developing that will reveal investor sentiment and market performance. Eventually, when enough data are compiled, we will have a small-cap index that can point us in the direction of where the market’s going.

Unlike major indexes – like the S&P 500 or small-cap Russell 2000 – ours isn’t a typical stock index. While hundreds of stocks are included in the index, stock prices actually have a relatively small effect on its daily movement.

Right now, one of the most popular economic forecasting tools is the Index of Leading Indicators, which is compiled by The Conference Board. While the index helps economists gauge where the economy is headed in the future, it eschews the predictive power of small-caps, and includes a number of metrics that are too slow moving for our purposes. The Index of Leading Indicators was designed to give a glimpse of where the economy is headed… our small-cap recovery index focuses on when specific stocks are about to move.

Small stocks are nimble and able to adapt – and a recovery in our sector is usually a telltale signal to mainstream investors – letting them know it’s a bit safer to test the waters of the market.

That’s why we have to be ready to make our moves. When the penny stock market moves – as it did this spring – it does so in a big hurry. The largest gains will go to those who are ready to pounce on shares early…

Right now, our database compiles the latest economic and market data every day… we’re waiting to get a statistically significant amount of data before we go public with the index.

Naturally, our Penny Stock Fortunes readers are going to be the first to learn what our small-cap recovery index tells us about the state of the market, but I can assure you that this isn’t the last time you hear about this exciting new tool here in the Penny Sleuth.

Cheers,
Jonas Elmerraji

July 29, 2009

Jonas Elmerraji

Jonas Elmerraji is an editor of Penny Stock Fortunes and a frequent contributor the Penny Sleuth. Jonas also occasionally writes for financial publications like Forbes, TheStreet.com, and Investopedia. He has been quoted as an investment expert in Investor’s Business Daily, Consumers Digest, and Bankrate.com among others. Before joining Agora Financial, Jonas’s held positions at an investment firm and at a “Big 4″ public accounting firm. He holds a degree in Financial Economics.

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