After a relatively mild spring, the heat was back for a while here in the Mid-Atlantic. We’ve already had a couple of days where the temperature climbed into the 90s, but things have settled back down a little and I have a feeling that the dog days of summer are yet to come.

The same is probably true for the market.

If you’ve been keeping up with your homework, you probably recall some early warnings of a market correction offered by some of our astute columnists (check out the Sleuth Archives if you need a refresher). Small-Cap Strategy Report editor James Boric has even told his readers to thoroughly scan their portfolios and consider selling some of their more speculative positions that would be hit harder by a sharp fall in the market. He’s not the only one who foresees this scenario.

And as I scanned the headlines last week, I began to notice many members of the financial media starting to warn their readers of an impending collapse.

MSN Money’s Jon Markman’s May 31 journal entry was my favorite.  In his column, he predicts a possible 10% to 25% decline in the market, with it bottoming out sometime before the year is over. The writing is on the wall, Markman says, citing some research on “90% downside days” (during which 90% of stocks go down when 90% of the volume is down).

“When these occur near market highs they tend to signal the beginning of a long slide,” Markman writes. “When they occur near the end of a bear market, and are followed soon after by their opposite, which is a 90% upside day, then it’s a signal that a bottom has formed.”

And what do you know? We had our very own 90% downside day on May 17. And a small rebound followed, just like this “downside” research predicts.

At the Sleuth offices here in sweltering Baltimore, our writers have access to some of the best contrarian thinkers around.  And they’ll tell you how the falling dollar, oil prices and some ill-informed giddiness over high house prices have helped lead us to this point. And apparently, Markman is right there with them. Is he attempting to get added to the Daily Reckoning’s payroll? Decide for yourself after you read this next passage:

“I think it is usually very important not to get too weighed down with what can go wrong in the market. If you’re a smart person, you have a critical mind and can nitpick all kinds of problems with the world. You can see that the dollar is falling, energy prices are soaring, home prices are stalling, the U.S. budget deficit is out of control, the Administration and Congress are flailing and inflation is on the advance. And you can conclude from all of these concerns that the market should fail.”

Although it’s hard to say exactly when it’ll all go down, bargain-hunting season could be right around the corner. If this is the case, then we’ll be ready to find some potentially great small-cap value plays for you during those dog days of summer.

Alternative Energy Update

It seems that some of the more rampant speculation in the biodiesel arena has passed. A few alert readers have written me with stories of catching some shares as they were on the way down.

After closing at $6.75 on May 10, Earth Biofuels (EBOF.OB: OTC BB) is settling at around $2.50 a share now. I first mentioned the company with a handful of other small biodiesel companies a few months ago when the share price was around $2.55.

“So what’s been happening with Earth Biofuels lately?,” one subscriber writes. Since I last wrote about the company, it has opened a second biodiesel facility in Oklahoma that will produce 10 million gallons of biodiesel a year. This will increase the company’s fuel production five-fold, since its flagship plant in Mississippi produces 2 million gallons a year.

And a day after this announcement, the company says it has opened a blending facility in Dallas, which the company says will reduce transportation costs normally incurred with biodiesel blends.

These two announcements came at the beginning of the charge that led the stock up to almost $7. News has been scarce since, and the share price has settled. As I have written before, you should expect some moderate-to-wild price swings when it comes to these small companies. Earth Biofuels has only been on the bulletin board since September, and any news (good or bad) could greatly affect its share price.

Due to popular demand, I’ll take a much closer look at this company next week, along with some others I’ve mentioned this year (Nova Oil, Biofuels Corp., etc.). Any other energy companies out there that interest you? E-mail me at thesleuth@agorafinancial.com and you might see your ideas mentioned in this space. And if you’re sick of ethanol, biodiesel and the like, then drop me a line about a sector you’d like to see covered.

Best,

Gunner
June 05, 2006

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite. Special Report: Imagine Getting Rich as Ignored Stocks Soar - You could turn $200 into $1.2 million!

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