The last time we talked about our Small-Cap Recovery Index (SCRI), we looked at how the SCRI was performing compared to the S&P 500. Today, we’re taking a look at how the SCRI can tell us precisely which industries are leading the charge to recovery…

Knowing precisely which industries to watch is exactly what we said the SCRI was capable of delivering…

Now we’ve made that level of data a reality, and we’re finally getting a first look at how different sectors of the SCRI are performing.

There are two very interesting takeaways from the charts — first, industry standings were pretty much in line with our expectations, and second, it’s important to note that even the best industries of the SCRI are having a rough month.

It’s no surprise that media and education are among the best performers right now — media companies got slammed in the aftermath of the credit crunch, and education companies have seen increased activity as job seekers look to beef up their resumes with advanced degrees. What is more interesting, however, is that real estate investment trusts (REITs) are already starting to come back.

REIT prices also got hit hard last year, but increased real estate values this soon in the recovery process could be a very big deal for consumer confidence.

The worst performing small-cap sectors of the last month are also little surprise to investors who have been following the economy in the last year. With dried-up discretionary spending, transportation, industrial and building material companies have continued to fight to keep the lights on. Taking the biggest hit, though, was our miscellaneous sector, which includes several hospitality companies and a gym chain.

There’s been a lot of downward pressure on our Small-Cap Recovery Index over the course of the last month. That’s especially evident among our best performing sectors, in which engineering stocks finished the month in the red, but still managed to make our “best” list.

That’s yet another confirmation of what the SCRI Oscillator warned about last month — that stocks would be headed back down in the coming weeks. Going forward, it’s essential to be wary of the worst performing small-cap industries right now, as their underperformance isn’t likely to change until the market changes its mind. And right now, it’s doubtful that we’ll see much of a jolt in the next couple of weeks.

As always, we’ll keep you updated on what the SCRI is indicating to us.

Cheers,
Jonas Elmerraji

October 21, 2009

The Four Small-Cap Industries Best Positioned for Gains Right Now was originally featured in the Penny Sleuth.

With the small-cap research tool I’m about to show you, you’re well on your way to seeing how the market moves ahead of the herd.

Here’s everything you need to know…

A while back, I wrote to you about our Small-Cap Recovery Index. The index is composed of fundamental data from 100 small-cap stocks, as well as economic factors like unemployment and personal savings rate.

It’s designed to give us a glimpse at signs of recovery for the stock market.

While the market has rebounded in a big way since it bottomed in March, many investors are concerned that stock prices are already getting out of whack. But we’ve designed the Small-Cap Recovery Index to go beyond share prices.

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. The majority of the index is based on the latest available fundamental performance.

But while gauging how “healthy” the market is can be very valuable, the Small-Cap Recovery Index provides us with considerably more data. In fact, as we continue to watch the index, we hope to use the information it provides to not only peg where the broad market is headed, but which industries hold the keys to growth.

We can accomplish this thanks to the predictive power of small-cap stocks. You see, historically, penny stocks lead the stock market out of recession. “From 1943–2007, 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,” explained Ken Kurson in an article published on Esquire.com a few months back.

By monitoring how small caps perform fundamentally and technically, we can essentially predict where more major indexes — the S&P 500, for instance — are headed.

Now, 12 weeks into collecting and analyzing our data, we’ve already caught some indications that the index is doing its job. More on that in a bit…

A Look at the Small-Cap Market

The chart above shows the Small-Cap Recovery Index for the last 12 weeks. The index, which is calculated daily after the market close, is based on a 100 scale — its current value of 107.4 means that the Small-Cap Recovery Index has gained 7.4% since we began tracking it.

While a high number for the S&P 500, which just measures share prices, could suggest that stocks are overvalued, when it comes to the Small-Cap Recovery Index, bigger is definitely better. That’s because a higher number means that the small caps that make up our index are performing well for investors and — more importantly in this environment — performing well from a financial and economic perspective.

In the past couple of months, the index has seen its value increase materially, which is a very good thing. But while the SCRI’s value gives us a good idea of how small caps are performing, it doesn’t do a very good job of actually predicting where the markets will move next. That’s where the oscillator comes in…

The Small-Cap Recovery Index Oscillator

The Small-Cap Recovery Index Oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 — meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down.

We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous to detail here, we’ve determined that if you had used those rules to invest in the ProShares Ultra S&P 500 ETF (NYSEArca: SSO) or the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.26%!

And right now, with the oscillator (the blue line in the graph below) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong — we’re still in the early stages of collecting data and testing its accuracy.

So what’s the SCRI Oscillator telling us right now?

While it’s good that the SCRI has increased in the last 12 weeks, a quick look at the oscillator shows us that the S&P 500 has increased much more quickly — that’s actually a bad thing for the market because it means that investors have overvalued the S&P against the fundamentals of the market.

And already, we’re seeing the S&P 500 start to decline to fall back in line with the Small-Cap Recovery Index. Unless big stocks improve their fundamentals enough to match the small-caps, it’s time to expect a tumble in the S&P back to SCRI levels. We still have considerable data to collect before we begin to use SCRI data in our stock picking methodology, but right now, it’s clear that the index could soon become a very powerful tool in our investment arsenal.

Cheers,
Jonas Elmerraji

September 10, 2009

Update: The Only Tool You Need to Predict the Market’s Moves was originally featured in the Penny Sleuth.

While that may sound like a very specific prediction for a market that’s been anything but predictable this year, thanks to our newest investing tool we’ve got a little bit of added insight into where the market’s headed in the short term.

A few weeks back, I wrote to you about the Small-Cap Recovery Index that Penny Stock Fortunes editors Greg Guenthner, Jim Nelson and I have been working on here at Agora Financial HQ.  The index was designed to use the predictive power of small-cap stocks and leading economic indicators to give us some clues as to when we might get our first glimpse at economic recovery.

That’s because historically, small-caps lead the way out of recessions. When big stocks are still in the throws of economic trouble, the smallest, most nimble companies are already climbing into prosperity. And as we gather data, we’re on the road to seeing just how well our index will be able to use that knowledge to our advantage.

Here’s the first look at our index so far:

For the last few months, our database has been compiling market and economic data daily, and establishing the baseline that we’ll be using to analyze the market at large. It’s exciting stuff, and just two weeks ago it became even more interesting…

In addition to predicting where the economy is going, we’ve been experimenting with the predictive ability of our Small-Cap Recovery Index on other parts of the stock market.

To that end, we’ve recently been taking a look at the Small-Cap Recovery Index Oscillator. The oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 – meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down. And thus far, our expectations have been met:

Here’s where things get interesting… We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous – and boring – to detail here, we’ve determined that if you had used those rules to invest in the ProProShares Ultra S&P500 ETF (NYSE: SSO) or the ProShares UltraShort S&P500 ETF (NYSE: SDS) depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.52%!

And right now, with the oscillator (the blue line in the graph above) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong – we’re still in the early stages of collecting data and testing its accuracy.

So far, though, the Small-Cap Recovery Index Oscillator has been incredibly precise with its buy and sell signals. If it’s right again, it’s time to get back into shares of SDS.

Cheers,
Jonas Elmerraji

August 21, 2009

Scoring 36% Gains in Six Weeks with Our Favorite Small-Cap Tool was originally featured in the Penny Sleuth.

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

Get Your Window to the Future with Our Newest Investing Tool was originally featured in the Penny Sleuth.