Well, folks, this week we have a special issue of Penny Sleuth. Our very own Penny Sleuth, Irwin Greenstein, and resident OTC expert, Carl “the Gripper” Waynberg, have been debating whether nanotech is the next powerhouse technology or dot-com blow-up.

In fact, they have been publicly arguing on the topic for well over a week now. And it’s gotten UGLY. In fact, we jokingly said at our editors-only conference last week that a referee was needed so this little riff didn’t get violent.

We may be too late. Word is that Irwin and the Gripper have already exchanged punches. However, no blood was shed. I think they both missed each other. That could change today though — in our first Penny Sleuth Smack Down.

Both our contestants will plead their cases for and against nanotechnology. They will exchange investment blow after blow — until someone can’t stand it a second longer. And in the end, you will have to decide who is right — Irwin or Carl. (Or maybe they both full of crap! You let me know.)

Remember, Carl thinks nanotech is a gold mine. Irwin thinks it’s a sink hole. So here we go…

In the tradition of Ali v. Frazier, Alien v. Predator, and Kerrigan v. Harding, I present The Penny Sleuth v. The Gripper:  Nano No-Go or Nano Mojo? You decide…

Gents, LET’S GET READDDYYYY TO GRUMMMMBBBLLLLEEEE…

P.S.

If you want to find out more about Carl’s incredible track record using his Grip trading system, check out his Web site at www.the-gripper.com.

Nano Smack-Down: The Penny Sleuth v. The Gripper

CW: Irwin, you ignorant slut. First of all, does it not strike you as even a little ironic that the editor of Penny Sleuth — an investment service built on the lionization of the smallest participants in the stock universe — is condemning the physical universe’s smallest participants? Do you not recognize the irony in that? But you’ll be happy to know, Irwin, that thanks to nanotech, you can now get a lot more irony into a much thinner space.

IG: Then let me do just that. Let me set you and the record straight from the get-go about the nanotech sector that you think is so hot, hot, hot. The best news about nanotech is that if you Google the word, you’ll get 161,597.2% more results than if you searched for “Virgin Mary cheese sandwich” — that petrified, toasted artifact with a supposed likeness of the Blessed Mother’s face that recently sold to an Internet casino for $28,000.

CW: When did I say the nanotech sector is “hot, hot, hot”? In fact, I don’t think it’s hot, hot, hot, which is exactly why I’m big on it now. If it were hot, I’d be waiting for it to cool off.

IG: Hot or cold, simply put, nanotech is the Virgin Mary cheese sandwich of Wall Street. It’s sort of something, but not really, depending on how drunk you are and if the light is just right. I know that with a true believer like yourself, anything is possible. But for the devoted and humble Penny Sleuth, anything is NOT possible.

CW: Another irony. I’m talking hard science; you’re making quasi-religious allusions, though you’re right when you allude to the religious-like fervor nanotech went through, a fervor that accompanies any new technology’s intro to the Street. But in fact, nanotech’s not a new technology at all. You remind me of that Woody Allen line: “My Lord, My Lord, what hast Thou done, lately?” We all know the working definition of nanotechnology: the manipulation of physical matter on a molecular level.

But nanotech can really be thought of as another utilitarian application of quantum physics. Understanding how things work on a subatomic level — the interplay of forces and particles, etc. — has changed everything about our lives. Computers, the Internet, microwave ovens and on and on and on — none of these things would exist without an understanding of quantum mechanics. The term “nanotechnology” has been in use since the mid-’80s, and the underlying concepts have been around for 40 years, ever since theoretical physicist and noted madcap Richard Feynman dared to ask, “What would happen if we could arrange the atoms one by one the way we want them?” Well, we’re now at the molecular stage. It won’t be long before it’ll be atom-by-atom manipulation. You’re reacting today just like Feynman’s listeners reacted more than 40 years ago to his lecture “There’s Plenty of Room at the Bottom.”

IG: I know there’s plenty of room at the bottom. All you have to do is look at the Merrill Lynch Nanotech Index, which, in the interest of irony, was launched on April Fools’ Day 2004. Of the 25 equally weighted companies in the index, only five reported profits in their most recent earnings announcements. Reading through them, the phrase “net loss” became mind numbing. I got so depressed thinking about those poor investors that I had to satisfy my craving for something substantial with a bacon cheeseburger from the Mount Vernon Stable.

CW: Merrill Lynch’s introduction of its nanotechnology index was an unabashed, insulting attempt to cash in on the nano craze. When it introduced the index — I think April Fools’ Day was appropriate — most of the 25 names on the index had nothing to do with nanotech by its real definition. But it strikes me as paradoxical, Irwin, that in one breath you criticize the Street for hyping an unworthy technology, and in the next you invoke the Street to support what you’re saying. It’s been proven time and time again that you can hardly do better than to do the opposite of what Wall Street’s delicate geniuses are telling you to do. And there’s also proof, by the way, that the time to buy stocks is not when earnings rise, but when they fall — when they’re taken down, not bid up. I’m much more comfortable with nanotech as an investment now than I was a year ago, now that there’s been a bit of a shakeout. The National Science Foundation predicts that nanotech will be a $1 trillion market in 10 years. The federal funding for nanotech research increased 728% between 1997 and 2004. Both Clinton and George W. have increased nanotechnology funding. George W.’s 2005 budget — even with cutbacks in other areas – increases nanotech funding to $982 million. When a technology comes along that bridges political ideologies and science, it’s time to take notice.

IG: If you want to throw numbers around, Carl, try these out: Since 1998, the venture community has invested only $1.2 billion in nanotech startups. If that sounds impressive, let me put it into perspective. In 2004, VCs invested a total of $20 billion in new companies, and of that largess, nanotechs got a paltry $200 million. And that’s down from $385 million two years ago.

CW: Music to my ears. VCs are being a lot more prudent. They’re still feeling the dot-com burn, and that’s a good thing. They’re looking for late-stage companies, companies with proprietary technology that will be the basis of commercialization or, ideally, companies already generating revenue or that are on the cusp of it. Really, they’re looking for GRIP picks, but it would be self-serving to say that, so let’s take a look at what non-GRIP companies are doing about nanotech: Dow, DuPont, Exxon Mobil, ChevronTexaco, Motorola, Boeing, Hewlett-Packard, IBM, Intel and a growing number of Fortune 100 companies are devoting more and more of their R&D efforts to nanotech.

IG: Carl, you should pull your head out of the lab beaker. OK, so the lab-coat set is busy rearranging molecules for products that may or may not be safe for consumers. Because from where I sit, when we talk nanotech, we’re talking about screwing around with the natural order of things at the most basic level. In Thailand, thanks to the glories of nanotech, they’re producing rice that’s green and purple. Our very own USDA is force-feeding nanotech antibiotics to chickens. And BASF, Kraft and other big companies with billion-dollar labs are developing new nanomaterials to extend the shelf life of their food. I’m telling you, Carl, once the mass media get ahold of this news, there’ll be riots in the streets, like the massive frankenfood protests in Europe. R&D is worthless if there’s no market for the end products — or, worse, if people are afraid of them.

CW: “The natural order”? So I guess you don’t go to a doctor. The natural order is what we decide it is. You’re right, though, Irwin, there are some potential hazards associated with nanotech. The good news, from an investment standpoint, is that there’s no one to blame. Who does one hold accountable for the basic nature of nanotech materials — God, maybe, but I’d say he’s safe from litigation. This isn’t asbestos…there’s no one to point a finger at.

But it’s not like nanotech is this insidious, festering virus. In fact, one nanotech company — EnviroSystems — developed this product it calls EcoTru. It’s a nontoxic, noncorrosive, nonirritating, hospital- and military-grade disinfectant that has proven 100% effective in killing E. coli, TB, staph and a bevy of other viruses and bacteria. Best of all, it kills these little buggers without doing us any harm, which is why it’s the only disinfectant on the market that carries no warning labels. Have you heard of Angel Docs? It is a group of doctors who do pro bono work in Third World countries. They were doing work in Africa, ran out of surgical disinfectant and had no choice but to give EcoTru a try. It hasn’t been approved for this purpose, and EnviroSystems had no idea that the docs used it this way until after the fact. EcoTru proved 100% effective in eliminating post-op infections in 500 out of 500 cases. So much for harmful.

But the salient question here is can investors make money in nanotech? And clearly, the answer is yes. Do you know that $20 billion of Intel’s revenue is derived from nanotech? Twenty billion dollars! And we’re just getting warmed up.

IG: Not if Bill Joy has something to do with it. As the co-founder of Sun Microsystems, Joy is one of America’s foremost scientists. In the April 2000 issue of Wired magazine, Joy’s landmark article, which called for a moratorium on nanotech, galvanized environmental groups and nanotech skeptics who agreed with him that the risks of reshuffling our subatomic world far outweigh the hyped-up benefits. Let me see, do I want to line up behind Bill Joy…or some Fortune 500 CEO who could be next in line to take the perp walk?

CW: You mean Kill Joy? I’ll side with Richard Feynman and the multitudes who’ve followed in his footsteps before I side with a bunch of granola-munching mamby pambies who’ve made it their lifework to criticize humanity. Again: Can investors make money? Is nanotech a commercial technology? The answer is yes. Look at Nano-Tex, for instance. Nano-Tex has licensed its nanotechnology of the same name to more than 20 textile mills around the world. In fact, it’s widely credited with saving Burlington Industries from extinction. Nano-Tex renders fabrics impervious to the klutz factor without changing their feel — unlike Scotchguard and other fabric treatments. If you’re wearing shmattes from Eddie Bauer, L.L. Bean, Gap, Old Navy, Nike or Champion, you’re probably wearing nanotech. You of all people, Irwin, should feel the joys of Nano-Tex. If your pants were Nano-Tex-treated, that apple juice you seem to have spilled on your pants would’ve rolled right off…that is apple juice, right?

IG: Actually, Carl, it’s champagne, which I’ll renounce immediately if I ever find out that those precious tiny bubbles have been nanoized. Say what you want about the French, but never in a million years…

CW: Put down that frog bubbly and try numbing the pain with Flex-Power — another viable nanotech company. They make this joint and muscle pain-relief cream that’s “powered” by liposome-delivery nanotechnology. It’s endorsed by a growing list of professional athletes: the Nets’ Jason Kidd, the 49ers’ Andre Carter and Jeremy Newberry, the Browns’ quarterback Jeff Garcia, Lorrie Fair of the U.S. Women’s World Cup soccer team, former slugger Hank Aaron — and a growing list of armchair athletes with Budweiser elbow. These pros not only swear by the stuff — they invest in it.

IG: Yeah, and they also use steroids. Now here’s the rub — no pun intended — when it comes to nano-enhanced drugs. It’s something called the FDA. If the folks who brought us Celebrex, BEXTRA and Vioxx reject the approval of a nano drug, the company’s stock will tank quicker than the Titanic. This is not speculation. Because the University of Massachusetts conducted a study that showed that for 41 public companies whose new-drug applications were rejected by the FDA in the 1990s, their stock dropped an average of 11.2% the next day…and another 5.9% the following day.

CW: There are risks in every business. If you’re not willing to take on any risk, you shouldn’t be in the market at all. Just stuff your green in the mattress and go play some golf. Speaking of which, another nanotech company, NanoDynamics, makes a golf ball that, while it won’t correct a 45-degree slice, will fly truer than a Titleist. Thanks to nanotechnology, NanoDynamics’ golf ball absorbs the energy from the golf club and helps correct for rotation and drift. Combine that golf ball with the New Majesty driver, courtesy of Maruman, and you’ll have nobody to blame but yourself. The New Majesty is made of nano-titanium materials called fullerenes. It’s harder and more resilient than plan ol’ titanium, so it bends less and drives farther. And Maruman — a Japanese company, by the way, so nanotech’s not just an American dream — has had difficulty keeping up with demand.

IG: Sounds like James Boric could use those amazing balls.

CW: I’ve already placed the order. I’ve got a little something for you, too, buddy: NANO SKIN TECH. This is skincare specialist BioNova’s nanotechnology, and it’s at the forefront of a trend that extends beyond skin care into other areas of health care: the trend toward personalized medicine. BioNova’s lab coats consider such things as age, sex, race and lifestyle when they mix up a personalized skin care solution for a customer. And by the way, NANO SKIN TECH accounts for half of BioNova’s sales. I’m tellin’ you, Irwin, nanotech can have you looking as good as you ever will. Just remember: They’re not magicians.

IG: I harbor no illusions. Neither should investors. Those firms are all privately held, aren’t they? They may prove commercial viability, but what about investors?

CW: Well, for that, we’ll have to look at the nano tape. There are currently three nanotech plays in The GRIP portfolio. One is a nanotech pure play, a licensor of nanotechnology that also holds the rights to the single most important nanotechnology patent, according to patent attorneys Donald J. Featherstone and Michael D. Specht of Sterne Kessler Goldstein Fox. Shares of this nano-tot are up 42% since Dec. 28. The second GRIP nano-play is in the energy field; it’s up 22% during the same time frame. And the third is a long-time GRIP fave with an intellectual property portfolio of more than 100 patents and patents pending. This little engine is purring in nanotech’s sweet spot, the convergence of biotech and nanotech. It’s up 44% since Nov. 30 and 1,092% — you heard me right — 1,092% since becoming a GRIP pick, way back in May 2001. The lesson here? Do your due diligence, exploit the trend early, and hang on for the ride.

IG: I admit those are great numbers, Carl. But uninformed investors can come dangerously close to sinking their money in the next potential Nanosys. If that company had ever managed to go public..well, it’s just too horrific to even think about it.

CW: Sure. Look, it’s important to do your homework. Venture capitalist Alex Wong of Apax Partners has reviewed hundreds of potential nanotech investments, but has invested in only two. So yeah, as with all investments, due diligence is the first step. As for Nanosys, the fact is Nanosys did the right thing. The Nasdaq had plunged about 8% the previous month (July 2004), the worst monthly performance in nearly a year and a half, and 14 of the 28 companies that had come to market in July fell below their IPO prices. I’d be more concerned about Nanosys and its management if they’d plowed ahead anyway, despite the frosty market conditions.

IG: By the way, in the spirit of due diligence, I’m assuming you read that piece.

CW: Yes, of course I read it. I almost always agree with what you say, which is why I was so blown away by the huge miss here. To dismiss an entire industry — its underlying technology, its commerciality, its investment potential — on the basis of one pulled IPO… Well, I expected more than horse-and-buggy thinking from the proud owner of a Beemer. And that “tale of dread” of yours isn’t nearly as scary as the overblown reaction to it: There are, after all, inherent risks to any business. Am I to assume, Irwin, that in addition to nanotech, you’ve stricken medical device makers, REITs and wireless technology from your potential investment list as well? Because companies in each of these industries pulled their IPOs on the very same day. At this rate, you’ll have us all investing in tulips again.

IG: Not exactly, Carl. I fall in with Chris Mayer, editor of Fleet Street Letter, who has made 67%, 76% and 117% by investing in companies with “assets that sweat.” That’s why I’ve written about small-cap companies such as railroads, manufacturing and, speaking of sweating…diet foods — the kinds that you drink and eat using our God-given teeth and gullet.

CW: Oy! You’re exhausting. Chris is no slouch, that’s for sure. But as for your nanotech paroxysm, only if we set aside all the evidence can I admit that you have a point. Not a nanopoint, though — something even smaller…one of those top quarks or muons or such things — those tiniest of the tiniest of particles that, much like your argument, are here for the briefest moment only to evaporate into nothingness.

March 01, 2005

Nano Smack-Down: The Penny Sleuth v. The Gripper was originally featured in the Penny Sleuth.

*** I went to the podiatrist yesterday and got a dose of bad news. It looks like I have arthritis in my right big toe and will require surgery. The doctor said it probably came from a combination of treadmill and cross trainer power workouts. It would be an outpatient procedure, about 2½ hours long, but I’d be on crutches for months. As I was leaving his office and feeling really sorry for myself, he broke some crushing news to me.

The good doctor has lost a bundle on small-cap stocks. Knowing that I cover the beat, he asked my opinion about what to do. I asked him about his trading practices, and I was absolutely floored when he told me that he traded on chat room gossip. Suddenly, it all became painfully clear…

He might as well be stopping strangers in the mall and asking them what they think about the market. In fact, he’d probably be better off, because at least he could look them straight in the eye. OK, fellow Sleuthers, a word of caution…

NEVER TRADE ON CHAT ROOM CHITCHAT. If you read about the world’s best traders, they always stick to their own counsel. In fact, Jesse Livermore, considered by many to be the best trader who ever lived, followed a sacred rule to ignore tips from chumps. Every time he broke that rule, he lost a bundle.

Chat rooms are just that…chat. And for all you know, it could be chat from a slobbering psychopath, an irate employee or a 9-year-old who broke into his parents’ liquor cabinet.

The only way to make big bucks on small-cap stocks is to conduct thorough due diligence, be patient and follow your stop losses (and, of course, read Penny Sleuth every Tuesday and Friday).

And talk about losing money…

*** Buy.com is planning a comeback IPO. Get this madness…

Buy.com, a self-proclaimed Internet superstore, had gone public in 2000 at $13 per share. The stock peaked at $25.13, but when it tanked to 17 cents in 2001, founder and CEO Scott Blum took it private. Now Blum is looking is to take it public again… EVEN THOUGH THE COMPANY HAS NEVER TURNED A PROFIT.

While this could be a sour deal for investors getting in after the IPO, it’s a sweet one for Blum. Since Blum paid $23.6 million for Buy.com and holds 98% of the company, a proposed IPO at $13 per share puts the company’s valuation at some $86 million. With the IPO, Buy.com will repay Blum $25.8 million that he loaned the company while it was private. And you thought sailing was an expensive hobby.

How has Blum done so far?

The S-1 filing submitted to the SEC reports that in the year ended Dec. 31, 2004, Buy.com incurred a loss of $15.4 million, down from its loss of $25.6 million in 2003. Meanwhile, operating expenses declined to $43 million last year from $166.8 million in 2000. So it looks like Blum cut losses by cutting overhead. Blum has been experimenting with various pricing formulas, but still hasn’t cracked the code…because Buy.com is losing 5 cents on every dollar of revenue.

While Buy.com may be a long-term small-cap play that capitalizes on the strength of the e-commerce wave, forget about the IPO. Instead, think crude…

*** Standard & Poor’s just issued a report under its “Small-Cap Dynamics” banner, which includes an analysis of small-cap energy stocks. When it comes to both commodities and equities, S&P believes that the segment is undervalued. Core assumptions include supply constraints, fewer existing wells primarily from a lack of investment and political instability. The shortage is expected to worsen due to greater consumption by emerging economies such as China and India.

After reading the information, I checked in with Kevin Kerr, editor of Resource Trader Alert. For those of you who haven’t heard of Kevin, he’s a regular on MSNBC.

Kevin’s take on small-cap energy stocks is that they’re offering stellar opportunities for investors to jump on the energy profits bandwagon in an affordable way.

Kevin pointed out that small-cap domestic energy stocks sold like hotcakes when crude oil backed off its highs initially Monday. It didn’t matter whether a company was focused on the Permian Basin, the Gulf of Mexico, oil, coal, gas or drilling services. If it was small, up a bunch this year and reeked of fumes, it was a candidate for indiscriminate selling.

“This sell-off really just goes to show the volatile mix of insanity and capitalism that trading is sometimes, especially since many of the names that sold off don’t normally trade on the basis of crude oil prices,” Kevin said. “Some actually explore for natural gas, for instance, which is as different from crude oil as an orange is from a potato.

“The move was largely emotion driven, as many late-coming shareholders hit the panic button when the International Energy Agency recently suggested that high crude prices would erode demand. Uh, absolutely wrong!”

I know that Kevin has a lot more on his mind….that’s why you should click here: http://www.agora-inc.com/reports/RTA/WRTAF111

*** Small-cap exchange-traded funds (ETFs) recovered from a January thrashing as institutional investors and hedge fund managers pumped $593 million into them during the last three days of the month, according to research firm TrimTabs. This begs the question, are we seeing the so-called January effect?

The January effect posits that stocks (especially small caps) have historically risen during the period starting the last day of December and ending on the fourth trading day of January. The ensuing sell-off is for tax write-offs, capital gains and Christmas present bills (after all, sweetie, the new Aston Martin V12 Vanquish S does cost $255,000).

Anyway, two research firms found there is something to the January effect. Ibbotson Associates concluded that small cap stocks performed better in January in 56 of the 69 years between 1926 and 1995. Instinet cites academic studies that show smaller stocks on the New York Stock Exchange outperformed larger ones in January by almost 11 percent from 1926 to 1981. From 1982 to 1995, the gap narrowed to 4.48 percent. Citing its own research, Instinet concluded that between 1996 and 1999, the performance difference was only 1.98 percent.

As the gap narrows, there’s a growing consensus that the January effect may become as outdated as the Druid calendar. We’ll see…

In the mean time, just before the month closed bargain hunters swooped down to drive small caps back up. For example, the Russell 2000 small-cap index received an infusion of $286 million on Jan. 31, although the index still had a negative cash flow of $773 million for the month. Obviously, the smart money is warming to small caps again. Does the January effect mean plenty of new opportunities for us in February and beyond? At this point, we’re remaining cautiously optimistic about the upswing. Stay tuned…

*** He’s back! Carl “The GRIPPER” Waynberg writes about technicals, tea leaves and rugged individualism. Let’s say that Carl has a sixth sense about these things. CUT TO:

Bulls and Bears and Pigs, Wolves and Sheep and Eagles, and One Dead Frenchman

Gustave Flaubert, the French novelist best known for his scandalous portrayal of an adulteress (published 20 years before Tolstoy’s scandalous portrayal of an adulteress), despised stupidity and cliche. His Dictionary of Received Ideas pokes merciless satirical fun at bourgeois banality. It’s a testament to overused catchphrases and a kind of anthology of the stupidity of French society during the Second Empire.

Since there was then, as now, no shortage of stupidity, it was an ever-expanding work that likely would have worn its own dust jacket – had Gus not succumbed to cliche by doing just what we all do at the end of our lives: dying. It seems his hypocrisy knew no bounds.

Human nature being what it is – and not being what it could be – Flaubert could have kept himself very busy with just this one work, and I can imagine he would have devoted at least a chapter to our friends on Wall Street. Let us pick up where Gus shuffled off.

A STOCK PICKER’S MARKET: Often preceded by “the market is at a crossroads,” “time will tell” or a fluffy, exasperated “well,” it indicates its utterer is completely stumped and has, like Gus himself, thrown in the towel.

It’s not that it’s wrong – it’s just not very helpful and there’s a troublesome implicit admission behind the cliche. Most markets are a stock picker’s market, so why make a special note of this one? The only reason would be to lower expectations. It’s a way for money managers to confess to clients, “Look, I learned how to make money in a bull market, but not in a stock picker’s market. I suppose I could work harder, but frankly, it won’t help, ’cause I’m just not that smart, so don’t expect much.” It’s kind of a welcome, even if only implied, warning coming from a crowd that hoodwinked us into believing in buying a stock when it’s rising and selling when it’s falling – a strategy Ben Graham
described as “the exact opposite of sound business sense everywhere else.”

Certainly, there are plenty of reasons to be bearish – that’s true. But the evidence is so clear – the evidence supporting a bearish view on the one hand, and the evidence telling us how to deal with it on the other – that there’s no reason to be stymied.

First, evidence of the bear…

We can start with an economy that’s beginning to look just a little winded. The yield curve has been flattening – meaning the gap between short- and long-term interest rates is narrowing – and bonds, which typically weaken when the Fed tightens short-term rates, are instead showing atypical strength. If short-term rates overtake long-term rates, you have at least part of the recipe for a recession.

If it’s true that earnings drive growth, the market’s fortunes still don’t look good. Because corporations have managed better-than-average earnings growth during the current expansion, it’s going to become increasingly difficult for them to expand their earnings moving forward, a difficulty that’s compounded by the relative dearth of technological innovation. In other words, quarterly comparisons will be much tougher this year than last.

The technical picture is crystal clear, too, with the trend having turned definitively short-term bearish just a few weeks ago. Between November and December, the Dow, S&P 500, Nasdaq and Russell 2000 all had bullish crossovers of their 50-day moving averages through their 200-day moving averages, beginning with the Russell 2000 on Nov. 1 and followed by the S&P 500 a few days later, the Nasdaq a week later and the Dow at the beginning of December. These crossovers produced the anticipated strong performances that followed. But a few weeks ago, all the indexes breached their 50-day moving averages. This looks like a classic rotation, with what was once support now offering resistance. In addition, each market rally – most recently, the three-day rally between the 13th and the 18th of January and the four-day rally from the 24th through the 27th – has been summarily sold off, indicating a top has been put in place.

Speaking of rotation, the Amex Drug Index is trading below its 50-day as well, but over the past two months, it has outperformed both the S&P 500 and the Nasdaq. This rotation in favor of drug stocks, a group that’s considered defensive, is, then, considered bearish for the broader market. Investors’ preference for drug stocks over tech stocks is an indication they’ve grown more averse to risk, an interpretation supported by the lack of new money being put to work. (Mutual fund inflows have been uncharacteristically low for a January.)

Despite all the blather you’ve probably been hearing, the one recent bright spot has been small caps. The Russell 2000 is off 6% for the month, but the ratio of the Russell 2000 (RUT) to the S&P 500 (SPX) has been in a gentle uptrend since Dec. 12. Small caps ceded market leadership to big caps in the first week of January and are now struggling to wrestle it back. If they are unsuccessful, this would be bearish – another indication of increasing aversion to risk. Indeed, big caps tend to fare best when they are being outperformed by small caps. The more likely scenario, however, is that neither will lead for the short term. The RUT/SPX ratio got a boost in November, thanks to one of those bullish 50-day crossovers. But there’s no such bullish technical indicator at work today, and the 50- and 200-day moving averages look to be leveling out into a horizontal channel that signals performance parity between small caps and big caps.

Technicals not your bag? How ’bout tea leaves?

AS JANUARY GOES, SO GOES THE YEAR: A perennial favorite among cliches. Every year – almost like clockwork – the Street breaks out into impromptu choruses of, “As January goes, so goes the year.” And to be fair, there is some statistical evidence that January does possess some unique predictive power (it’s been particularly accurate since the ’40s). But the reason for this power has escaped explanation, and more rational people think it’s a lot of hooey – “robust to data snooping,” as researchers might describe it, which means that if you set out with the idea of finding a pattern, you’ll probably find one. In investing, data snooping has given rise to all sorts of “trends” – like the January Effect – that are really just a matter of coincidence, but that doesn’t stop investors from trying to exploit them. The comforting (and kind of unnerving) thing about a trend, like the January Effect, is that it need not be real to exist. Yes, it may be a figment of the Street’s imagination, but if enough investors come to believe in it, it becomes a self-fulfilling prophecy.

Anyway, if this one holds up, we’re in for a rough ride. January’s lowlights: The Dow – lower in the first three weeks for the first time since 1982, a recession year – and the S&P 500 both down 3.5%, the Nasdaq lower by 6.8%.

One other “trend” does offer a few photons of hope, however, but it requires the Eagles of Philly to soar on Sunday. According to the Super Bowl Indicator, a win by a team from the old NFL is bullish, while a win by a team from the old AFL is bearish. Hey – it’s been accurate 30 of 38 Super Bowls! It was notably wrong last year, though, thanks to that November-to-December surge, which saved the Pats from being the market’s patsies. Perhaps another Pats victory portends not pecuniary peril, but profits.

Still, that’s not much to hang your helmet on. Another cliche comes to the rescue…

BULLS CAN MAKE MONEY, AND BEARS CAN MAKE MONEY, BUT PIGS GET SLAUGHTERED: The contrarian response to the kind of massive weakness we’re seeing is (a) to protect the downside by setting up specific exit strategies for your stocks and (b) to become more active in the search for investment candidates – not less. Contrarians look on such a decisively bearish market as not an obstacle, but an opportunity – an opportunity to search every outhouse, doghouse, cathouse, henhouse and no-tell motel for any stocks that have been unfairly punished by the bear. If you’re a contrarian, this kind of weakness is to be exploited, not feared.

And by combining a contrarian search for the undeservedly downtrodden with a search for momentum stocks that are bullishly bucking the downtrend (especially those with current or imminent bullish 50-day crossovers), a player in today’s market can be both investor and trader, setting up market-beating long- and short-term positions.

IF YOU CAN’T GRAB THE BULL BY THE HORNS, GRAB THE BEAR BY ITS CLAWS: I’m not sure what that means, either, but I do know that you can start exploiting the bear by employing some of the strategies James outlined in Sleuth just a few days ago – all value strategies and all, therefore, manifestations of a contrarian ideology. For most investors, despite all the evidence favoring it, contrarianism is still not easy to embrace. It can be unnerving to be the lone wolf, to act alone against the herd of investors. You may find comfort in the fact that those who can muster the courage tend to benefit in the long run.

WHILE THE CHICKEN AND SHEEP ARE SLAUGHTERED, THE FOX FEASTS: Now that’s a trend worth playing.

This has been…

Carl Waynberg
The GRIPPER

February 01, 2008

Carl Waynberg is editor of The GRIP, a unique contrarian investment strategy for investors who prefer the road less traveled. The GRIP targets young companies that trade on the OTC Bulletin Board. Over the past two years, his portfolios of just such stocks identified 18 companies that went on to the fame and fortune of the NASDAQ and AMEX.

Bulls and Bears and Pigs, Wolves and Sheep and Eagles, and One Dead Frenchman was originally featured in the Penny Sleuth.