You’ve got to like any index that can gain 3.4% in a day, which is exactly what the Russell 2000 Small Cap Index did today. The Russell 2K closed at 499… the highest reading since November 10th. That translates into a gain of 5.5% for the month of December. That certainly doesn’t wipe away the entire bear market, but it sure offers hope.

Of course the question is one of persistence…. will these same buyers be in the same buying mood come 2009? Nobody really knows for sure, but the last few sessions have made things considerably more bullish on a technical basis.

First and foremost is a month-long string of higher highs and higher lows (blue lines). The result of such a rise is the second bullish argument… support at the 20 day moving average line (green).

The inherent problem with this much strength and a move of this size is a wide separation between where the Russell 2000 is now and that 20 day line; a little to much distance means the index is apt to be reeled in. That’s ok, but it doesn’t really lay a foundation for a strong start to the new year. As long as the 20 day line at 470 holds up as support during the next retest though - whenever it is - the uptrend will remain intact. This is a great start.

By the way, the R2K’s 20 day line has intercepted the 50 day moving average line (purple) for the first time since September. So, something significant has had to have changed.

Start receiving FREE e-research on select small and micro cap stocks. Get in-depth research reports, comprehensive coverage, exclusive market commentary and more, just by becoming a MCP subscriber today! Look for the submission form at the top of the right-hand column.

As we close out not only the month of December, but the year as well, we think it’s worth mentioning this month is on pace to be a winner….. though barely. The S&P 500 is literally 2 points above where it closed in November. A soft breeze in the wrong direction could put it back in the red for the month, but volatility should wind down as the day comes to a close.

If we do end the month in the black, it will be the first time in four months we’ve done so, and the second time in seven months (and the fourth time in fourteen). While it’s still a tad premature to start relying on a recovery, it’s not too soon to entertain the idea…. again. The “how much worse could it get?” argument is actually starting to hold water.

That, however, isn’t the ultimate purpose of this blog entry. Rather, we want to highlight our research on December’s leading small cap groups/industries. There are a few surprises in there, and more importantly, many of them appear to have what it takes to keep leading the push higher. In other words, they may make for a solid small cap investment opportunity.

Check out December’s top 20 small cap industries (’small cap’ as defined by Standard & Poor’s)…..

Insurance brokers? Real estate? Construction & engineering? Airlines? All these industries were supposed to be in big trouble now that we’re ‘officially’ in a recession. Yet, their stocks are going higher - much higher. Undoubtedly there are a few flukes in the group, but one can’t help but wonder what other surprises these industry stocks may pull out of their hat.

The point is, don’t jump to bearish conclusions just because the media is telling you to be afraid. The fact is, the worst of any recession or bear market may well be behind us. If we can post a similar chart at the end of January (which is a distinct possibility), that notion will be even more founded. We’ll be following up on these small cap industries early in the new year.

Start receiving FREE e-research on select small and micro cap stocks. Get in-depth research reports, comprehensive coverage, exclusive market commentary and more, just by becoming a MCP subscriber today! Look for the submission form at the top of the right-hand column.

Miracles never cease…. the Federal Reserve may have actually done something constructive this week when they decided to push interest rates down to unprecedented levels. Oh, don’t misunderstand…. the long-term consequences of such an action are dire to say the least, but the all-important short term patch may actually get things going a little in the meantime. In short, the lending market is a little more unthawed than it was a week ago.

We examined the liquidity of the credit market back on October 20th, explaining that the higher the TED spread, the less likely it was that banks would be able to borrow from another, or be willing to lend to one another. At the time, the TED spread was at 3.08…under the October 10th peak of 4.6, but still well above the ‘norm’ in the 1.0 to 2.0 range.

Well, since cutting rates on Tuesday, the TED spread has fallen from 1.81 to the current level of 1.5. It would need to get a little closer to 1.0 to meet the usual level, but 1.5 is still healthy enough to get us out of a funk. It’s not the only factor in the equation though.

While banks may be more willing (perhaps tolerant of) to lend and borrow, that doesn’t necessarily mean the average consumer is willing and able to. A borrower still has to have strong credit to get a loan, even though the money is available now. And frankly, even with strong credit scores, no consumer wants to take on a lot of debt knowing there’s a good chance he or she could lose a job or have less disposable income next year.

Point being, the Fed is off the mark a little. To send rates to all-time lows is gimmicky at best, and shows desperation at worst. It’s psychological chess to a large degree, bit considering the last several rate cuts didn’t have an impact, it’s surprising the Fed was willing to shoot their last bullet in the rate cut gun. We better hope this one does the job. According to the TED spread though, it just might have, Stay tuned.

Start receiving FREE e-research on select small and micro cap stocks. Get in-depth research reports, comprehensive coverage, exclusive market commentary and more, just by becoming a MCP subscriber today! Look for the submission form at the top of the right-hand column.

Publicity is a funny thing - the more you get, the more you get. Maybe that’s why bulletin board company China Energy Recovery (CGYV) has been everywhere in the media over the last few days… attention gets attention. Here’s a quick breakdown of their most recent media appearances; we’ll end the list with a grand finale that we consider to be a monster-sized achievement… a national television broadcast feature.

If you’re really into alternative energy investing, you’ve probably heard of the site PowerAlternatives.com. Their focal point - obviously - is alternative energy. More important to us, however, is that China Energy board member Roger Ballentine was recently interviewed by the site. This is great exposure to a small-but-active crowd. To replay the interview (it’s in an MP3 format), go to the China Energy page at the Power Alternatives site.

Registration might be required to listen, but don’t worry - we registered and haven’t gotten one solicitation e-mail from them yet.

Speaking of online radio, Ballentine was also recently interviewed by Commodity Watch Radio. You can replay this one as well, as it’s also in an MP3 format. The cool part about the Commodity Watch Radio page where the China Energy interview is accessible is that it also includes an information sheet about the company. You can go to that page just by clicking here. (You may want to just for the info sheet; there are a couple of details in it that we’ve never discussed.)

Commodity Watch Radio has a bigger following than Power Alternatives does. But, both of those online radio outlets pale in comparison to the more recent publicity….

When’s the last time you saw a bulletin board company mentioned on national news TV? Probably never, but your answer is about to change to “just now”.

If you’re a fan of CNN (or the station’s website CNN.com), then you may have already seen the clip. If not, then here’s your chance to see the positive light that CNN put on China Energy’s waste-heat solution. This was the likely reason for yesterday’s pop. However, there should also be an echo-effect of interest. That’s good for shares, as it could draw in more buyers.

Anyway, here’s the China Energy clip from CNN.com. A short commercial plays first, and then the China Energy piece begins.

Needless to say, it hasn’t been a bad week for China Energy or its investors.

Start receiving FREE e-research on select small and micro cap stocks. Get in-depth research reports, comprehensive coverage, exclusive market commentary and more, just by becoming a MCP subscriber today! Look for the submission form at the top of the right-hand column.

Thanks for all the feedback regarding yesterday’s newlsetter “Obama’s Pick Very Good For Some Investors”. Some of you agreed, some of you disagreed, and some of you just had responses. As always, we read your all your notes, and are responding publicly to the ones we think need to be shared.

Here’s the first e-mail…..

Hi,
Do you happen to know if CGYV has any patents on their technology?
Thanks.

Editor’s response: Yes. I’m not sure what the patent actually covers, but I think it’s the entire waste-heat-capture concept. The patent discussion came up when we first started talking with China Energy, and they made it pretty clear nobody could compete with them with a similar product for the life of the patent.

Another reader wrote in about either Obama or Chu….or perhaps both. (We couldn’t tell.)

One can never put too much trust/faith in one man…
You never know his ulterior motives, so, please, STOP, your utopist and nirvanesque ideas, let Barack Hussein Obama, a.k.a., Barry Soetoro becomes President and see how far to the Left he will be moving, then, you will come down to Earth, flat in your belly, to say the least, lol.

Editor’s response: Just to be clear, we’ve got no particular love for Barack Obama. We’re mostly non-political… we just want to make the most money we can, however we can, no matter who’s in office. If we were political though, we’d probably lean more to the right than the left.

If you somehow sensed we were on the left (or that we really cared), then frankly, your internal bias is causing you to read something into our thoughts that just isn’t there. Anyway…

I’m not really sure how to respond, because your only intent seems to be to insult Obama, his vision, us, and anybody who might see a glimmer of hope under a Democratic regime. Unfortunately, you never actually made a point, possibly because you were too consumed with jumping to conclusions about our point of view. (Sorry - I just call ‘em like I see ‘em.)

We’re hardly utopists, but cleaner energy and cheaper energy isn’t a utopist pipedream - it’s just good sense, and within the realm of possibility. Will it actually happen under Chu? Maybe, or maybe not, but surely you won’t deny that it couldn’t be any worse than what we’ve got now.

If you want to get specific with your thoughts so we can have a discussion, please leave them below. You seem passionate about things, which I like. But, I think your passion prevented you from a meaningful dialogue. Calm down, and start over.

And finally, we got this response, which is clearly about Steven Chu…

If he is a greenie, we are all in deep doo-doo.   Anyone who stands against the use of coal is an idiot.   We are going to have economic distress that will make the ’30s depression look like a Sunday school picnic.   Global warming is a myth, and we are headed for Hades with this guy in charge.

Editors’ response: I agree with some of what you said, but not all of it.

Yes, Chu is a bit of an extremist, possibly to the point of not being a realist. I think that’s more for show though… he paints a very black and white picture about coal, but I don’t think he really thinks coal should be banned. (As we specifically pointed out in the newsletter, coal provides 1/3 to 1/2 of this nation’s electricity, so it’s not going away anytime soon.)

Are we going to move into a depression worse than the 30’s? You think so. I don’t. I’ll entertain your argument, but you have to make one with specific evidence - why are we going to? You can get back to me on that one. (It doesn’t even have to be good evidence…it just has to be reasonably rational.)

Global warming may indeed be a myth - there’s evidence for both sides of the argument. Personally, I think the planet’s getting hotter because of the way the ice-age cycle runs…we’re still closer to the end of the last one than the beginning of the next one. However, I’m open-minded to evidence to the contrary. That wasn’t Chu’s point though….

Global warming aside, carbon pollution is NOT a myth. It may or may not cause global warming, but there are - quantifiably - more toxins put into the air every year. To disregard that reality is like a smoker of 40 years acting surprised he or she has lung cancer. You think all that smoke coming out of factory smokestacks is going into outer space? That’s what’s bugging Chu, and that pollution is not a myth.

As far as heading to Hades with ‘this guy’ in charge, do you mean Chu, or Obama? More importantly, why do you think that? Be specific, so we can start a real dialogue and not just a whining session.

Last Thoughts

We’ve not said this in so many words before, but we will now - we’re not political, we’re not activists, we’re not religious, we’re not scientists, and we’re not sociologists. Our interest in those arenas goes no further than how we can best make money by understanding them.

It’s clear from your responses above (and from other feedback) that many of you think we’re highly-opinionated, or biased. If that’s you, then honestly, you’re seeing things that aren’t there. We almost always have perspective, but it’s a rational and logical perspective - not political or emotional.

If our comments rub you the wrong way, that’s not our intent, but we’re not going to hold back. Our goal is to inspire thought and discussion - nothing more. If you can’t handle that (which is fairly benign), then frankly, your personal/political side is probably a little too close to your financial/investor side. If you can keep them distinguished, you’ll be better off.

Start receiving FREE e-research on select small and micro cap stocks. Get in-depth research reports, comprehensive coverage, exclusive market commentary and more, just by becoming a MCP subscriber today! Look for the submission form at the top of the right-hand column.

This week’s newsletter really stirred up a lot of great questions about cyclical and secular markets; thanks for all the feedback and responses. Since this is something we can all learn from (even if you don’t agree with it), we’re going to post some of the best Q&As on the topic of when the secular bear market will end, and when the secular bull market will begin.

One reader wrote in….

Haven’t we been in a secular bear market for almost nine years already? The longest secular bear market on your chart was sixteen years. The NASDAQ, for instance, would have to go up about 250% from here over the next seven years just to not do worse than the worst secular bear market over the last hundred years. Since market bottoms occur well before the end of secular bear markets (which you define as the point where the market permanently achieves new highs), secular bull markets have to start well before the end of secular bear markets. Unless we’re going off into uncharted territory, shouldn’t we be very close to the beginning of the next secular bull market?

Our response…

The average secular bear market lasts 14 years (between 12 and 16 in all three prior cases). I think that average will apply to the current secular bear, if we’re indeed in one.

So, to answer your question, yes, we’re 9 years into a secular bear, which means we’re going to be in this rut until sometime around 2015 (give or take). And to answer your other question, yes, the uptrend for the first leg in a secular bull starts during the tail-end of the secular bear market. (Technically though, the bull doesn’t start until the bear ends, which means hindsight is required to really know the end-date or start-date.)

For me - though I think semantics is a factor here - the new secular bull market won’t start until we actually start to achieve new highs….which will by default mean we start it because of a prolonged (cyclical) bullish trend.

Other people might say the new secular bull starts with the first upswing in the last portion of a secular bear, meaning there’s some overlap. I think this is your description. I don’t think there’s an official wrong or right definition though.

In any case (and in response to your point)…

We technically have about five more years - give or take - to go if we’re in a secular bear market. That’s long enough to start and finish a bull market, and start another bear market (though that would be a faster cycle than normal). When that last cyclical bear ends, hopefully four years from now or so, I think that will mark the beginning of a new secular bull.

The alternative is the one you posed… that the next upswing will actually be the beginning of the new secular bull. I really hope that’s the case, but I think we have one more complete cycle (bull to bear) to work through before we complete the secular cycle.

Only time will really tell though. So, let’s just be savvy and defensive in the meantime, which is good advice for any environment.

Another reader wrote in…

I can see the market having flat times and even a dead cat bounce sometimes, but what is going to keep us at this level over time or get us out of this mess? In 1929 we had the strongest currency in the world, the world owed us money, we were a production nation and sold to the world. Today we buy from the world, which transfers our wealth to them. We are also the brokest nation the world has ever seen and getting more in debt all the time. We can NEVER pay this debt back. A brand new Bretten Woods agreement will produce a new world order again and this time we are not going to be a leader. WWII got us out of the first great depression as we produced our way out. Today, what’s going to get us out? We can’t borrow and spend our way out of a depression!

All good questions and observations.

And we got this e-mail in response to the newsletter from two weeks ago, where we originally pointed out how the timing of the NBER’s “official” recession announcement was basically useless….

• 1. We don’t rely upon the government to tell us that there is a recession
• 2. We aren’t even close to the bottom

Thanks for the e-mail, though we’re not sure if you’re arguing with us, against is, or just commenting.

We fully agree that the government’s official opinion means nothing. The NBER isn’t a government agency, but even if it was it wouldn’t matter. Our government still won’t admit we’re in a recession either. If you’re saying we said the government’s official timing and terminology meant anything to us, we’re not sure how you got that impression.

As for not being close to a bottom, you’re possibly right …. we may not be. Nobody really knows. However, unless you can specifically point out a rationalized reason for the opinion, we can’t study your alternative view. Why are we not close to a bottom? Any context? Let’s get down and dirty with the details, because that’s what most investors aren’t willing to do (and why most of them don’t make any real money in the market).

Start receiving FREE e-research on select small and micro cap stocks. Get in-depth research reports, comprehensive coverage, exclusive market commentary and more, just by becoming a MCP subscriber today! Look for the submission form at the top of the right-hand column.