Though it doesn’t have a lot to do with the equity market (directly, anyway), we’ve been keeping an eye on the real estate and housing market. Though the ‘less bad is good’ has helped ease the mental burden, after three straight years of ‘less bad’, one has to start wondering if we should just accept the possibility that the glass is half empty.

To that end, let’s dig down deep into real estate numbers - now that we have February’s totals - and see if there’s actually a light at the end of the tunnel. To keep things simple, we’ve already plotted a chart of all the major housing market data sets.

From top to bottom….

Existing Home Sales: After spiking to 6.49 million units in November thanks to the tax credit, it looked like things were on the mend. But - and despite the fact that the credit is still out there for those who want it - the rate of home sales is back to 2008’s lull (pre-crash) levels. No help there.

Real Estate Inventory: Perhaps the pundits suggesting there was this ‘phantom’ inventory of houses that would hit the market when things looked better were right…. inventory levels edged up to 3.59 million homes last month. It’s not a trend yet, but could be a problem for home prices if last month’s increase is an omen.

New Home Sales: New home sales hit a multi-year low in February…. again.

New Homes For Sale: In light of the new home sales data, at least builders aren’t needlessly putting them on the market. Of course, it’s probable a case of “can’t anyway” more than “don’t want to”. (We’ve mentioned before that the construction industry is still too big to sustain all its companies. The data continues to validate the idea.) 

Average (New) Homes Sales Price: Despite the growing inventory levels and steep dip in actual purchases, sellers are finally starting to show they have a little pricing power. Though the data charted above refers specifically to new homes sold, we can reasonably infer other, existing home buyers are also paying slightly higher prices than they have been over the past thirteen months….. or can we?

The average new home sold for $282K last month, while the average existing home sale was made at a median price of $165K. The ‘average new’ and the ‘median existing’ data points to a divergence in the real estate buying trend though - the average new home price trend is pointed higher, while the median home (existing) sale price is going lower. What’s that mean? It means the bulk of home sales are being made at lower and lower prices, while a handful of new home sales are occurring at much higher prices than builders have been able to commend recently.

Said another way, most buyers are looking for less expensive homes than the recent norm, while a small number of new home buyers are really pushing up the definition of ‘higher end’ homes. Considering the new home market is only about 10% of the total market though, that’s nothing to get excited about.
So are there any conclusions we can make from this information?

Considering total home sales are still falling though (not to mention that inventory is on the rise), the ‘net’ numbers still suggest the overall real estate trend is a negative one.

None of this is to say the stock market can’t rebound just because the real estate market isn’t rebounding with it. In fact, we’re seeing stocks rebound without the help of real estate. It’s still a drag on the total economy though, which certainly doesn’t help equities.

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Last week we deliberately opened a can of worms about all the things that could be wrong with - and misleading about - this rally. While some may call it pessimistic, we’d rather be accurate and profitable than optimistic and broke. Besides, we didn’t say any pullback was going to last forever. We just suggested the looming pullback should be big enough that investors would want to avoid it if given a choice.

Today’s the third installment of the discussion, though if you missed the first two, you’ll want to go back and soak those in - today’s chat builds on those them. Here they are:

• What’s Wrong With This Rally (part 1, March 17th)
• What’s Wrong With This Rally - Breadth and Depth (part 3, March 19th)

With all of that under your hat (proverbially), let’s go ahead and take the next step by adding another layer of analysis to the clues that breadth and depth can provide.

Just to catch us up, here’s the updated look at the NASDAQ’s advancers, decliners (total numbers for each), ‘up’ volume, and ‘down’ volume. As was the case last time, the lighter colored histograms are the raw daily data, while the darker lines are the more important moving averages lines - which show the trends for each data set.

As we first pointed out last week, the decliners and the bearish volume have started to come in above trend more often than now, while the advancers and bullish volume were both coming in under the trend line (moving average) more often than not. That trend continued through Thursday, which also happened to dole out another big intra-day pullback. [Red flag: Four of the last six days have been losers… the worst record since late January.]

Interestingly, all of this started to happen even while the NASDAQ was moving higher. That’s the benefit of this analysis - it’s leading, warning investors of the undertow nobody else sees before it materializes…. not after.

Now, we posted this chart above so we could make sense of the next one.

On the chart below, you’re looking at the exact same information as above, save one difference…. the advancer and decliner data is overlaid on one another, and the ‘up’ and ‘down’ volume is overlaid as well. By doing this, we can make a direct comparison of advance/decline data, and a direct comparison of bullish/bearish volume data. More specifically, this allows us to make a firm bullish or bearish call simply by looking for crosses of the two moving averages for each set of data; red over green is bearish, and green over red is bullish. Take a look.

While the concept by be stunningly simple to the point of feeling stupid, don’t laugh it off - it works (the ‘depth’ crossovers in particular).

Though we can’t share our proprietary settings for these moving averages, setting up a similar chart of your own (and tweaking it for your style of trading) wouldn’t be hard to do. Or, you can just stay tuned to the Micro Cap Press blog and newsletter, since we intend to update it and share it with you as changes arise.

We’re still not done with the “What’s Wrong With This Rally” series. Look for a couple more additions to the list of things we monitor on a regular basis that serve as early warnings.

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On Wednesday of this week we posed a pretty pointed question…”What’s wrong with this rally?” One of the answers at the time was the CBOE Volatility Index, or VIX - it was dangerously low, which often occurs right as the market is topping out.

Though the VIX his a new multi-year low today, and reversed higher, we would caution any investor against drawing too much of a conclusion based on today’s data alone… or yesterday’s for that matter.

Today is a so-called triple-witching day, when monthly and quarterly options and futures expire. It can wreak havoc with the market, and the VIX in particular since the VIX is based on option prices. By Tuesday of the coming week we’ll be able to trust the VIX as a directional clue again. That said, if not much changes for the CBOE Volatility Index by then, the problem of too much confidence will force us to sound the bearish alarm again.

We also mentioned on Wednesday how other problems and red flags were starting to pop up for the market. As these have nothing to do with options or futures, we can go ahead and safely talk about one of them today - breadth and depth. (Yes, it’s one tool, with two data sets.)

We’ve talked about breadth and depth before, so we’ll skip the detailed introduction today. Let’s just sum it up by describing breadth is a comparison of the number of advancers for any given day versus the number of decliners for any given day. Likewise, depth is the comparison of the total trade volume for those advancers versus the total volume for the decliners. Determining bullish and bearish trends is as easy as it sounds…. more is better.

While the data can be ‘total market’, most of the time it’s considered on a per-exchange basis. For instance, our chart of the NASDAQ Composite below also compares the NASDAQ’s advancers and decliners, in addition to comparing the NASDAQ’s bullish volume and bearish volume. The raw data for each appears as light-colored histograms below; each is labeled.

That said, in order to clean the data up and put it into a trend-spotting format, we’ve also added moving averages for the advancers, decliners, up volume, and down volume. Those are the darker lines you’ll find overlaid on the lighter-colored histograms. (Sorry, the moving average settings are proprietary.)

Now, knowing what everything is on the chart, we can now tell you to notice…

… how the bullish volume and the advancers were both - on a daily basis - generally coming in under their trend (moving average) lines even as the market was hitting new multi-year highs. At the same time, the daily decliners and the down volume both started to print above their trend lines or moving averages even though the market was rallying to new highs.

Take a look, but keep reading for our final thoughts. [By the way, the last day displayed on the chart is Thursday, March 18th.]

Amazing, huh? The market was not nearly as healthy as the rally would have led you to believe. The warning signs were there well before today’s (Friday’s) big pullback.

Sometimes this data is too erratic or indecisive to use in any format. Other times though - like now - it trends very well and sends an undeniable message. More importantly, it’s telling us now that this rally was never all that healthy, and Friday’s pullback may be the beginning of a pretty significant correction. We’ll let you know when the tide turns the other way again with this chart.

Oh, and here’s a bigger-screen chart that includes Friday’s (the 19th) data.
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We talked about this is some pretty deep detail back in the October 29th Newsletter “The Market Cycle Model Works“. Given its very solid success over the last twelve months though, it’s worth not only reiterating, but also expanding. So, below you’ll find a detailed table of all the sector rotation theories that correspond to a particular stage of the economic cycle.

As with any theory based on human perception and opinion in an arena that is highly regulated (yet not regulated enough), exceptions can and will occur. So, don’t take these models as gospel. They are, however, ideas that should be considered and tested - and perhaps acted upon - as you walk through the process for picking a stock.

In any case, here’s the detailed sector rotation and economic cycle sequence for a few of the market’s most prolific theorists (and a couple that couldn’t be attributed). Notice there are slight variations between them all…. something of a headache for strict adherists.

As the need arises (and it will sooner or later), we’ll refer back to this table as we try and pinpoint the market’s ‘best of the best’ in the future.

If you’re not subscribed to tghe free Micro Cap Press newslletter, then you’re going to miss out on when we make our next big sector or industry call. Sign up today, and you’ll know when, how, and where to use the data offered in the chart above. 

Is anybody else feeling uneasy about the distance and duration of the current market rally? We’re now five weeks into, and up nearly 10% since the bottom. If you’re keeping score, that’s the longest continuous rally since last March 6th’s bottom and rebound (which lasted until the peak on May 8th of 2009), and the third-biggest continuous rally since that March-2009 bottom. At some point, something’s got to give, right?

To answer our own question, yes, something has to give….. and it’s apt to give soon.

Though our primary interest lies in the market’s longer-term trends, we’re also huge fans of maximizing long-term gains by timing entries at short-term lows, and timing exits at short-term highs. Indeed, careful trade timing can realistically improve annual ‘buy and hold’ returns by as much as 50% (not raise the percentage rate of return by 50 percentage points, but increase your current rate of returns to 50% more than its current level…. a 10% return becomes a 15% return, for instance).

And what do our timing tools tell us now? We’ve got several we follow, and we intend to work our way through them over the next few days. The most pressing one - and the one we want to examine today - is the S&P 500’s Bollinger bands, and how that chart relates to the CBOE Volatility Index’s (or VIX) Bollinger bands.

In short, the market’s run about as far as it can feasibly run. How do we know? Because of the S&P 500’s history with its 50-day Bollinger bands (with 2 SDs). The band lines are plotted in red on the chart below.

As you can see, even following the strong bounce way back in March of last year, the S&P 500 remained ‘contained’ inside the confines of its band lines. Sometimes it reversed outright and moved lower when the band was met. Other times the SPX simply slowed down, and continued to trace the band line for a few days, as we say in late July last year (look for the yellow highlight). Either way, the index was stopped to some degree.

Certainly the S&P 500 could repeat last July’s pattern and simply slow down now, yet continue to move upward. Given the overall scenario though - the speed and size of the current rally - this overbought market is highly vulnerable to a reversal more like the others we’ve seen when this extreme level was hit.

That said, the VIX should be hitting its lower 50-day Bollinger band right now, running inversely with the S&P 500. But, it’s not.

Is this a problem? Yes and no. The VIX and the S&P 500 don’t have to walk hand-in-hand in order to play one off the other. Considering the market just hit multi-year highs though (and without the support of any meaningful news), it would make more sense if the VIX was at multi-year lows and testing its own band line as a floor.

So….. what do we do?

The failure to reach that lower band line doesn’t change the fact that investor confidence, as evidenced by the low VIX, is near multi-year highs. It’s dangerous simply because that’s generally the time when the market punishes that arrogance. In fact, all you have to do is go back over the last nine months and see that the VIX was at temporary low points right as the market peaked and pulled back.

The only thing the separation between the VIX and its lower Bollinger band does is put the timing into question. That’s ok though, since technically, the S&P 500 didn’t quite come in contact with its upper Bollinger band either. There’s still a little room for it to move higher, and a little more room for the VIX to move lower. Both can happen simultaneously, and both can happen in a day or less. It’s going to happen soon no matter what. That, or all these buyers are going to figure Wednesday was the day, and the dip will begin on Thursday. Either way…

Bottom line - don’t be fooled by another decent day from stocks. We’re at extreme levels now that are very consistent with significant peaks.

Be sure to stay tuned to the blog in the coming days, as we have other timing analysis we want to share with you….. particularly concerning volume, breadth, and depth.

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Consider it the Academy Awards of the penny stock world…. the Avatars and the Hurt Lockers of the micro cap universe.  Below, you’ll find the ‘best of’ stocks among micro cap names in the categories you care about as an investor….. cheapest, most growth, most promising, etc.

The only stipulation is a reasonable one. Any comparison to other companies or historical results has to be fair and meaningful. In other words, a $200 million company that earned a nickel last year and is on pace to earn a dollar this year is indeed probably in track to post the biggest improvement. But, it’s still only a dollar. We’re going to limit the applicant pool to penny stocks you’d actually be interested in for the right reasons. (And, we’ve excluded most closed-end funds and ETFs.)

The Cheapest Stock, Based on Historical P/E Ratio

The award goes to…. Republic Airways Holdings, Inc. (NASDAQ:RJET). A profitable airline? You bet - Republic Airways Holdings didn’t even flinch in the midst of the recession, growing sales and income in 2007 and then again in 2008.  Last year was an off year for total net income, as the company worked through some accounting hits. Yet, Republic Airways Holdings boasts a twelve-month operating P/E of 4.90. Next year’s estimated (and improved numbers) are just as solid, making RJET undervalued.

The Cheapest Stock Relative to 2010 Results, Based on Projected P/E Ratio

The award goes to…. Hallwood Group Inc. (AMEX:HWG), with a forward-looking (2010) P/E of 5.53. After three consecutive years of sales growth, and a swing to profit in 2008 that should more than quintuple when 2009’s final numbers are reported, the low valuation is more than plausible for the coming year. Hallwood Group is also completely uncovered by analysts, creating a great deal of upside potential as the numbers start to be realized by the institutions.

Strongest Earnings Growth, Based on 2010 Expectations

And the winner is….. Cumberland Pharmaceuticals Inc. (NASDAQ: CPIX). Depending on where you’re getting your data, the forecasted increase may or may not reflect the right numbers. Cumberland Pharmaceuticals went public in mid-2009, and 2010’s estimated EPS of $0.44 may or may not compared to 2009’s full-year pro-forma EPS of $0.17 (GAAP), or $0.29 (operating).

Either way, with earnings on pace to grow or 51% or 158% in 2010, CPIX is the most-realistic and feasible earnings growth winner. 2011’s anticipated EPS of $1.20, however, clinched the accolade for Cumberland Pharmaceuticals Inc.

Best All Around Micro Cap

Though all three of the stocks mentioned above are solid in their own right, none offer a ‘total package’ as attractive as this year’s - ok, this month’s - ‘Best All Around Micro Cap’. That award goes to…

…. Advanced Battery Technologies, Inc. (NASDAQ:ABAT).

Don’t let the lack of analyst coverage fool you - this green energy company is one of the few that’s actually making any money in the business. As the name implies, Advanced Battery Technologies makes the kinds of batteries that are currently used in personal electronics devices, and will ultimately be used is bigger items like cars, and household-power storage.

The company is on pace to earn $0.38 per share for 2009, translating into a P/E of 11.9 for ABAT. It’s more difficult to find a 2010 forecast, but a little digging reveals that a handful of analysts are looking for an average of $0.43 per share. That translates into a P/E of 9.5.

However, those numbers don’t adequately represent the growing need for these vehicular batteries, particularly in the electric-two-wheeled category. It may take two to three years (or more) for the opportunity to be fully realized by Advanced Battery Technologies, Inc. investors, but the risk/rewards scenario with ABAT is second to none (yet practically nobody knows it).

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The broad market continues to deal with its overbought status, struggling to make any more progress, but unwilling to yield an inch back to the bulls. We contend the latter is inevitable (at least to some degree). For a handful of penny stocks though, that bigger tide - or lack thereof - may not really matter. Here’s a look a charts of Mass Megawatts Wind Power Inc. (OTC:MMGW), Century Casinos, Inc. (NASDAQ:CNTY), and Jade Art Group Inc (OTC:JADA), each of which seems to be working on its on trend regardless of what the major indices are doing.

Jade Art Group Inc. (OTC:JADA)

Given the heavy dose of selling volume we’ve seen penny stock Jade Art Group Inc. stir up over the last five days, were mostly-inclined to view this chart as a bearish one. But…

…. until the wedge shape actually breaks - one side or the other - we don’t need to make that call. Indeed, disciplined trading dictates that we actually do wait for the triangle shape to break down before taking action on JADA (as was said in light of the volume trend). If we had to guess, we’ll go with a bearish outcome. Fortunately, we don’t have to guess.

The being said, minor horizontal support has been seen for Art Group Inc. around $0.32 and $0.35. Ultra-safe traders will want to wait for those floors to break down as well.

Mass Megawatts Wind Power Inc. (OTC:MMGW)

If the name Mass Megawatts Wind Power rings a bell, it may be because we’ve examined it before as part of our ‘green energy’ focus…. one of the few we’ve adopted. While MMGW shares haven’t done anything in the last two years to actually merit any attention, we may finally be seeing a light at the end of the tunnel.

One of the few bullish clues to date that this penny stock may actually be worth putting back on your radar is the fact that we’ve seen more net bullishness than bearishness since November. And, we’ve seen a modest improvement in buying volume. Both came after Mass Megawatts Wind Power Inc. shares revisited support around $0.52, which has been something of a floor for the stocks since 2007. It’s not a lot to go on yet, but it is something to build on in the foreseeable future.

To be clear though, MMGW got our attention (again) because it has been making sust89anable progress since late last year. The early 2008 and early 209 surges, in contrast, were not sustainable.

Century Casinos, Inc. (NASDAQ:CNTY)

Slice it any way you want to, but you’re still going to come up with the same conclusion for Century Casinos. The penny stock’s in a heap of trouble, and it will be a miracle of it moves higher anytime soon (i.e. before it gives up a great deal of ground).

The undeniable bearish clue is the combination of all the major moving averages (20, 50, 100. and 200 day average). We’ve seen every variety of bearish crosses for all of them on the chart of CNTY, and now, the 20-day line (blue) is acting as resistance - guiding the stock lower. The slat in the wound is the fact that the potential support level at the 38.2% Fibonacci retracement lines was snapped last week. The next one won’t be reached until $1.76. The falling resistance line (orange) is just gravy for the bears.

There’s very little room to interpret this chart any other way but bearish - it is what it is.

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As we were scouring the market for low-risk ‘green’ stocks to suggest in Saturday’s newsletter “Green Investing for Non-Speculators“ we came across several stocks that looked compelling, but didn’t quite fit our low-risk criteria.

Since some of them will still be of interest to many of you though, we’re going to highlight the best of those best anyway knowing they’re a little speculative. One of the best of that bunch comes from the biofuel world.

One of biofuels’ best-kept secrets is Syntroleum Corporation (SYNM). It shouldn’t be a secret though - the company is not only profitable (sort of), but owns key patents on the process used to convert coal and biomass to an energy-yielding gas as well is to liquid fuel, in addition to the patent on the process to convert animal fat to diesel and jet fuel.

Moreover, the technology works.

Yes, Syntroleum is also profitable when looking back, though we would caution you against reading too much into those numbers now. The bulk of those revenues came from technology licensing sales, engineering services, and reimbursement of development expenses. Those revenue sources won’t persist forever, but….

…. the plant that will be able to commercialize the production of Syntroleum’s biofuels is expected to be up and running by the middle of 2010. Between now and then, the revenue and income numbers may not reflect anything meaningful at all.

We say it’s the market’s best-kept secret for a handful of reasons, the biggest of which is a lack of analytical coverage… not that we blame the analysts. It’s difficult - if not impossible - to make any kind of forecast when the revenue-bearing operation isn’t up and running yet. With the first plant about 3/4 of the way done though, analysts should have a clear idea of what it will mean pretty soon; EPS estimates should follow. Investors, on the other hand, may not want to wait that long.

Is this a technology/marketability bet? Yes, though the technology is proven, and the company’s projected revenue based on 5000 barrels of synthetic fuel per day (with oil priced around $80/barrel) are plausible.

However, based on the partners Syntroleum has found, the term ‘bet’ may conjure up the wrong idea.

Were it just another fly-by-night biofuel concept dreamed up by a couple of guys in their garage, sure, SYNM may be a mere bet. Tyson Foods (TSN), however, is a 50/50 partner in the biofuel venture. Iit’s hard to imagine a company like Tyson getting involved in something like biofuels without knowing it was going to go somewhere profitable.

Chinese energy company Sinopec (SHI) also thinks highly of Syntroleum’s patented technology…. so much so, that they bought the rights to the technology for use in China. This sale of the technology to other energy companies not only points the way to other potential revenue sources (either licensing or outright sales), it also points to the power of the patented technology itself.

Bottom line? Though the line between ’speculation’ and ‘calculated risk’ can get blurry at times, SYNM actually falls pretty far on the ‘calculated risk’ side of the spectrum despite the fact that we’ll not see operational revenue until late in Q2 at the earliest. The company website offers a robust investor overview for those interested in doing a little more due diligence. In the case of Syntroleum Corporation, it’s a story worth that trouble.

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It’s been a while since we last looked at how the different market caps (micro through large) and styles (value and growth) have performed. Since there’s so much valuable data in knowing which arena is leading or lagging though [indeed, the cap, style, and sector is suggested to be worth 50% of a stock’s movement], we do want to take some time and recap those results today.

First though, let’s go back to the beginning…. back to what we can now safely say was the bear-market bottom and the beginning of the recovery.

The chart immediately below scores how each market cap and style index has performed since March 6th of last year. The winner? Micro caps, with a 95% gain. That, by the way, is the reason we remain focused on the group - these tiny companies are also the biggest opportunities when things are going even just moderately well. Take a look.

The loser has been large cap growth, with large cap value not too far ahead. Value, in general, has been stronger than growth.

That said, are any new trends emerging on the cap/style front? An updated version of the same chart will tell us. So, the next chart shows the same indices, but with the clock starting in November….. long enough to spot new trends, but not so long that we’ve missed the bulk of any new ones.

In a nutshell, no, things are still pretty much proceeding as they have been. Value is still outperforming growth, large caps are still lagging, and smaller companies are still in the lead. The only major switch between then and now isn’t even all that major…. micro caps have cooled off a bit since then. On the other hand, they deserved a break, and they’re still doing well.

As before, we’ll update these charts when merited.

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