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A description of the content follows : * The Bulls Strike Back, But the Future's Unchanged - Though the market managed to offset Tuesday's selloff and muster a gain for the week, the damage may already be done. And, considering the same damage has lead to bearish results before, the bulls may want to digest this reality. * From the Editor...

 
 
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The Micro Cap Press - Discover the Power of Early Stage Growth
Saturday, October 23, 2010 @ 9:50 am PDT Volume IV : Issue 40
In This Edition...

* The Bulls Strike Back, But the Future's Unchanged - Though the market managed to offset Tuesday's selloff and muster a gain for the week, the damage may already be done. And, considering the same damage has lead to bearish results before, the bulls may want to digest this reality. 

* From the Editor: Four Possibilities for the Sandbox Portfolio - With profits being taken on more than a few names in the sandbox portfolio during the month of October, the number of holdings is a little too depleted. Here are four potential trades that could be used to restock the portfolio, once the time for an entry is right. 
 

The Bulls Strike Back, But the Future's Unchanged 

Kudos to the bulls. The effort still isn't likely to be enough to thwart a pullback, but you have to give credit where it's due.

All told, investors shrugged up Tuesday's implosion, and managed to end the week with a small gain.... about half a percent in most cases. 

Yet, the problems are still glaring. Indeed, as each day passes, the problems glare a little more, pointing to a brewing downside move. 

Not that history is everything, but the shape of the S&P 500's chart (and all the index charts for that matter) are looking eerily like the charts we saw as of April of this year, June of last year, and to a lesser degree, like charts we saw in January of this year.

If you're wondering what the commonality is, there are two. The first one is, each of those periods were the end of an uptrend and the beginning of a substantial correction. The second common element - nobody really expected the selloffs to materialize at the time. 

The nearby charts tell the tale quite clearly. The market starts off the rally guns-a-blazin', slows down to a less heated pace for a few weeks, then really starts to fade once the upper Bollinger band (purple) is met. That's when we get the MACD crossunder that, you can tell if you look closely, actually happens BEFORE the market begins to slide lower. 

Ring a bell? Like we said, the shapes of the markets' charts over the last three weeks are eerily familiar.

In the interest of completeness, none of those pullbacks up-ended the longer-term bull trend, and we don't expect this one to either. If history is any indication, any selloff will be halted once the market reaches the lower Bollinger band line. Granted, with the S&P 500's lower band line currently at 1039, that's a rattling possibility in the current case. That line would be at a much higher level, however, by the time the index could actually get there.

That being said, what 'is' and what 'should be' can be two different things. 

Though all signs point to a move lower, clearly that move has not yet materialized. As such, this is a case where the smartest move may be to do nothing for the time being. We know the bulls are running out of gas; we just don't exactly know home much gas is left in the tank (though it isn't much). Be patient here, and wait for a key reversal day.... not unlike the one we say on Tuesday, even though it hasn't gotten traction yet. There will be plenty of trade-worthy downside once the move starts. 

From the Editor: New Names on the Watchlist 

For those of you who visit the site on a regular basis (or subscribe to the RSS feed), you'll already know the 'sandbox' portfolio sold La Barge (LB) and Sea Change (SEAC) on Tuesday, after bailing out of Westell (WSTL) on the 7th. Let's just say I have no regrets. We avoided a small pullback with SeaChange, a big pullback with La Barge (-5.7%), and avoided a ton of volatility with Westell. 

Though WSTL bounced back to $2.55 on Friday after reaching a low of $1.56 earlier in the week - after we sold it at $2.28 earlier in the month - it's still the kind of volatility that is (1) unpredictable and (2) usually best avoided.

In any case, I also promised with Tuesday' sell recommendations I'd be digging up some new trading possibilities for the portfolio. Here they are. 

None of them are actually going in the portfolio yet, but that doesn't mean you can't borrow them for yourself if you want - they're all certainly attractive enough 'as is'. I'm just waiting for a better price, and/or need to do a little more homework. In no particular order.... 

Rent-A-Center, Inc. (NASDAQ:RCII) - Though not nearly to the degree that other companies did, Rent-A-Center took some lumps during the recession. While a tough economy is actually a bit of a boost for rent-to-own retailers, the stunningly tight credit market - along with excessive pessimism - even crimped some of this company's business. With both confidence and credit on the mend though, Rent-A-Center, Inc. is seeing growth again. 

Better still, the stock is responding. After taking the April-June tumble like everything else did, RCII shares have stared to move upward again at a healthy pace. And with P/E rations just above 8.0 on a look-back and look-forward basis, why wouldn't they move higher? 

Rockwell-Collins Inc. (NYSE:COL) - No, it's not a micro cap. It barely even qualifies as a small cap (and that's a stretch). It's a solid play though. 

The key attraction here is the budding momentum. After a bearish patch early in the year, COL is coming out of a funk, and is still accelerating. In fact, the only flaw with the chart right now may be that it's a little overextended. One modest dip will take care of that. 

While more chart-inspired, it's not like Rockwell-Collins isn't backing it up with fiscal performance. Priced at about 17 times trailing earnings, it's worth noting that the company has beat estimates in its past three quarters. So, the pros may be underestimating this industrial electronics and machinery stock. 

Valspar Corporation (NYSE:VAL) - The prospect of owning shares in a paint company is probably about as exciting as watching paint dry - no argument there. It's reliable and safe though, and it can't hurt to add a little stability in any portfolio. That said.... 

Don't rule anything out. VAL shares managed to put up a 100% gain between the lows from early 2009 and the highs from early 2010, which is more than most stocks can say. In fact, Valspar shares are on the verge of new multi-year highs. 

Results-wise, the P/E ratios on the low teens are fine, though not earth shattering. We have seen a couple of big earnings beats over the last year though, and we also know other building materials stocks are on the move for the same (or similar) reason. 

American Equity Investment Life Holding (NYSE:AEL) - Speaking of groups that are moving, insurers have also been hot of late, yet there's still tons of room to recover for the industry's stocks.... including American Equity Investment Life Holding. 

To be clear, insurance stocks don't necessarily compare to other stocks on a valuation basis; the revenue and business model are quirky. Yet, with a P/E of around 6.0 on a trailing and projected basis, even a quirky business model can't suggest AEL is anything but a bargain.

Better still, it's the consistency of growth driving the value. American Equity Investment Life Holdings made more money in 2008 than it did on 2007, and more in 2009 than it did in 2008. We've also seen 'beats' in five of the last eight quarters, so clearly the company is doing something right. 

Though the stock has been stagnant for a few months now, you get the sense that it's itching for a breakout. 

Like I said above, none of them are being put into the portfolio just yet. I'll let you know in the blog or in the newsletter if we make a buy out of any of them. 

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