Investing is all about having an edge. That’s why investors who constantly work on gaining their edge generally end up on top. And that’s also the reason why we created the Small-Cap Recovery Index, an index of 100 small-cap stocks that’s designed to tell us how small stocks are performing – and more importantly, where to focus our search for the next breakout penny stock play.

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

Jonas Elmerraji

A big-four public accounting alum, Jonas Elmerraji brings his readers extensive expertise in small-cap stocks and broad market moves. Elmerraji’s interest in the market started with an investing course in elementary school – today he holds a degree in financial economics from UMBC and specializes in blending fundamental and technical analysis. Elmerraji has contributed to Forbes, TheStreet.com, and Investors Business Daily among others. He is managing editor of the Penny Momentum Trader, and a co-editor of Penny Stock Fortunes.

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