Despite a strong start to the year, the market feels very top-heavy this week. Sideways action or a couple of down sessions could help alleviate the pressure. So far today, we’re seeing very narrow action in the major indexes. According to Bespoke Investment Group, the S&P 500 is pace for its longest stretch of non 1% days (in either direction — six so far) since May 2011.

Indecision reigns over the equity universe for now. But behind the scenes, stocks appear to be cooking up a plan to continue the positive momentum…

Industrials, Transports Confirm

In Dow Theory, an uptrending market is confirmed when both the Dow Jones Industrial Average and the Dow Jones Transportation Average each post higher highs. The thinking behind this signal is very simple: If the economy is supporting the production of new goods, and these goods are being delivered to consumers, the basic requirements for a bull market exist.

Strong closes in the industrials and transports yesterday easily best the two indexes’ October highs:

Even the Worst Performers Are Enjoying Gains

Even a stock that no one wanted at any price — Netflix Inc. (NASDAQ:NFLX) — has enjoyed a rebound since the calendar changed over to 2012. Shares have risen more than 30% since Jan. 3:

The early January rally truly has been a rising tide. Toxic stocks from December are once again in vogue (at least for now). It will be interesting to see if the new trends continue — or if these small rallies become just another wishful moment on the road to lower prices…

Pharma Predictions Already Coming True

Over the weekend, Bristol-Myers Squibb said it would pay $2.5 billion for Inhibitex, a promising small-cap biopharma heavily involved in groundbreaking Hepatitis C treatments. The $2.5 billion buy price is a huge premium for the small company, netting shareholders a quick gain of more than 125%:

In late December, I predicted that the pharmaceutical sector would outshine the market this year.

The telling statistic is that by 2016, patents are set to expire for many of the best-selling drugs on the market, totaling $255 billion in annual sales. Generics will reap the benefits, and major drug labels will be scrambling to put their cash to good use.

I expect to see several more small-cap and mid-cap pharma acquisitions during the first half of 2012…

In the meantime, we’re seeing sympathy movers from similar small-cap biotechs. Two additional small-cap hepatitis C drug developers, Idenix Pharmaceuticals Inc. (NASDAQ:IDIX) and Achillion Pharmaceuticals Inc. (NASDAQ:ACHN) both popped double-digits on the news. Other potential small-cap acquisition targets are seeing generous gains as speculators position themselves for short-term trading opportunities…

Sincerely,

Greg Guenthner
for The Penny Sleuth

Greg Guenthner

Greg Guenthner heads up Agora Financial’s small-cap division and is the founder of one of the only independent OTC research advisories in the industry. A graduate of George Mason University, Guenthner joined Agora in 2005 after several years as a journalist. He is managing editor of Penny Stock Fortunes and Bulletin Board Elite.

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