Well, it’s certainly not been an easy three months, but at least it’s not been a losing three months. And, there’s some solace in the fact that we’ve beaten the S&P 500’s loss of 4.5% since early June; the ‘Sandbox’ portfolio is right around a break-even for that period. Take a look.

As for individual holdings, take a look at  the table below, as it’s the last time you’ll see it with this particular group of holdings; it’s time to shed and add some new names to see if we can squeeze a little more performance out of the market.

What’s going? We’re selling…

• Core Mark Holding (CORE) - Strictly a defensive exit; we’re slipping too deep into the red to just ignore the daily losses. It’s unfortunate too, since the value was and is still there.
• Scientific Learning (SCIL) - Another defensive exit. SCIL is just now starting to slip significantly into the red, but we have a chance here to nip it in the bud.

On the chopping block…

SeaChange (SEAC) - Earnings will be out on the 2nd, and we may have a better idea of why this cable TV company stock has been struggling of late. Yes, it may be too late to pull the plug then, but overall we see enough cash flow and earnings to suggest the volatility-risk here isn’t in staying in, but in getting out.

And the newest additions are….

Open Text (OTEX) - The past twelve months isn’t anything to write home about, but the next twelve - and 2011’s projected P/E of 10.53 - is looking quite compelling,. The stock’s got plenty of momentum as well, yet the rally is well-paced.

The investment-worthy nature of this business isn’t a new one to Micro Cap Press readers. Open Text is essentially a Software-as-a-Service (SaaS) provider, which means recurring revenue and high-margin business. Best of all, it’s still mostly unknown and under-appreciated.

CenturyLink (CTL) - It’s tough to make out on the chart, but the bulls are re-emerging here with CTL. The buying volume has been solid, and we can see a bullish divergence of the moving averages again. If the $36.55 mark can be cleared, the fireworks will really start. The technical foundation for CenturyLink is solid enough as is though.

And, the underlying fundamental are even better. The top and bottom lines are growing like crazy, margins remain strong, and the sub-12 P/E measures (past and projected) are attractive. Plus, CenturyLink is a pretty reliable earnings ‘beat’.

Just as a reminder, we’re allocating 5% of the total hypothetical portfolio to each trade, which h gives us a capacity of up to 20 stocks at a time.

As for recent news (that matters)….

• LaBarge (LB) - Look for its prior quarter’s financial results before the market opens on September 2nd. The stock’s been edging higher over the last two weeks, perhaps indicative of solid numbers. We’re4 concerned either way though; ‘buy the rumor, sell the news’.
• SeaChange (SEAC) - Will also be posting last quarter’s numbers on September 2nd, but after the market closes.
• Triangle Capital (TCAP) - declared a $0.41 dividend a few days ago…. one of the reasons we got into the venture capital holding in the first place. The date of record is September 8th, though we plan on holding TCAP in the sandbox portfolio much longer than that.

That’s it for now, and maybe through September all the way until October. It looks like we’re going to see stocks driven lower per the usual September slump, which almost always ends in the third week of October.

Self-fulfilling prophecy? Probably, but it doesn’t matter…. it’s happening anyway. You need to tread lightly in your ‘real’ portfolios as well.

And just for perspective, the sandbox portfolio positions are largely longer-term holdings that were meant to be held through such a rough patch (even if we try and play the pullback with a quick trade).

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In Saturday’s newsletter we dissected the S&P 500’s chart to within an inch of its life, though we could have done the NASDAQ just as easily. And, it would have been just as telling. Since such an analysis may have value to some of our readers (who are more into tech and stocks of all sizes), here’s a similar look at the composite’s good, bad, and ugly as of last Friday.

First and foremost, don’t be shocked that the NASDAQ posted such strong numbers on Friday, gaining 34.94 points to close out at 2153.63. Though still in the hole for the week, the bulk of last week’s damage was confined to one day….. Tuesday. Moreover, when you take a step back and look at the bigger picture, the bullishness from Wednesday and Friday starts to look like more than luck.

To be specific, the composite seems to be finding support at two former proven support lines - the horizontal floor (black, dashed) at 2100, and the lower Bollinger band (red) at 2091.

In fact, when taking the bigger-picture look, it becomes pretty clear the NASDAQ is simply range-bound, as it has been since May, between the two dashed lines. Last week’s bullishness is just an attempt to push off the lower edge of the range. And, odds are that it will be able to make good on the effort, especially considering the strong volume buy-in and strong reversal bar we saw on Friday.

As you may have been able to guess from the chart, no amount of bullishness will mean much unless the composite can actually get past the whole mess of moving averages as well as the upper Bollinger band, which will be around 2300 by the time it can be retested. The upper edge of the trading range is at 2311 (blue, dashed), which we’ll use as the final bull/neutral decision point.

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Last week may have been a light week in terms of the amount of economic data, but it was plenty important… particularly on the housing front. And, the news wasn’t good. New home sales plunged to an all-time low annualized sale rate of 276K, while existing home sales plunged to a multi-year low of 3.83 million.

Durable goods orders figures didn’t help the issue at all. July’s durable goods orders were up 0.3%, versus expectations of a 3.0% increase. When vehicles are taken out of the equation though, durable goods orders actually plunged by 3.8% last month, versus forecasts for a 0.5% improvement.

The second quarter GDP figure is going to be closer to 1.6% when the final figure is calculated. It’s better than the alternative (negative numbers), but it’s nothing to celebrate either.

The only bright spot from last week was still a dubious one… unemployment claims dropped. New claims fell from 504K to 473K, which is still higher than the recent average. Ongoing claims fell from 4518K to 4456K, which is in line with the recent levels. No real progress is being seen on either front.

Economic Calendar (8/22 through 8/28)

As for the coming week, it’s going to be a busy one to be sure - too many items are on the list to detail them. And, too much is on the plate to try and figure one out before the next one is announced. Just keep the following calendar nearby, and bear in mind that even neutral numbers have been interpreted as bearish lately.

Economic Calendar, This Week (8/29 through 9/4)

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Whether they should or shouldn’t is irrelevant…. investors ARE planning on a double-dip, at least according to the sector ETFs they’ve started to buy and/or sell. Since July 2nd when the rebound ‘began but didn’t really begin’, the iShares Utilities Fund (IDU) and the iShares Telecom Fund (IYZ) have joined up with the iShares Basic Materials Fund (IYM) to take the number 1, 3, and 2 spots - respectively - in terms of total return during that period.

It’s an interesting and surprising set of new leaders, as utilities and telecom were two of the three WORST performers between March of 2009 and April of 2010.

Why the sudden change of heart? The most easily-attributed cause is a shift from optimism to fear in the harts and minds of investors.

For the better part of 2009 and early 2010, ‘growth’ and ‘aggressive’ were all the rage, as those arenas perform best in the early stages of an economic rebound. That’s why the iShares Financial Fund (IYF), the iShares Basic Materials Fund (IYM), the iShares Industrial Fund (IYJ), and the iShares Technology Fund (IYW) were leading the pack between March of 2009 and April of 2009. Clearly those areas are higher risk, but the risk is ‘worth it’ when the economy is starting to roll again.

Conversely, the lack of growth opportunity posed by the likes of ’safe’ utilities and telecom are the reason the iShares Utilities Fund (IDU) and the iShares Telecom Fund (IYZ) were in the cellar for the better part of 2009 and early 2010.

Now, since early July, two of those four former leaders are dragging the bottom (financials and technology), while the industrial ETF is in the lower half of performers. The only one still hanging in there is the basic materials fund. And, two of the three former worst performers - utilities and telecom - are now two of the three best performers. Talk about a paradigm shift.

Were it only a few days that we had observed this divergence, or even a couple of weeks, we might be able to chalk it up to volatility. Now neatly two months into it though, it’s hard to say this isn’t a trend…. especially considering the utilities fund managed to (solely) make bullish progress in the fade of yesterday’s bearish headwind.

The $64,000 question is, does this rotation mean we’re headed for a double dip? Unfortunately, it’s a question we can’t answer. On the other hand, the right answer to the question may not matter…. if investors are assuming a double dip is inevitable, they ARE GOING TO behave accordingly and drive safe-haven sectors upward while pushing risky sectors lower whether it’s the smart move or not. That’s why one has to acknowledge and respond to the trends as they unfold, as opposed to assuming everything always makes sense (a la “The market can stay irrational longer than I can stay solvent” - John Maynard Keynes).

Regarding timing, this trend is apt to last as long as investors fear the worst. That may be only a few more days, though at this point all investors need to consider the possibility that the collective market may have thrown in the towel for the time being, and may not want to return until October… the usual bear killer.

There’s always a chance stocks won’t find salvation at that point in the year, but bluntly, by that point (as Q3 earnings season begins) it should be clear that we’re not actually at the end of the world - we’re just in a rough patch that is more between investors’ ears than on companies’ books. We’ll look for a major bottom then. In the meantime, we’re going shopping for utilities and telecom.

Oh, and if the theme sounds familiar, it’s what we predicted back in December of last year.  We were a little early on the call (almost all of them, actually), but things are pretty much unfolding as we expected them to here in stage two of the recovery process.

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Last week was pretty modest for the market… about a 0.7% dip for the SPX, and a decent ’save’ on Friday to leave things off on a not-disastrous note. Unfortunately, that’s not going to cut it for the bulls at this point - they need a decisive string of gaining days to reignite last month’s bullishness.

Why’s that? Because, while the S&P 500 has shown us a couple of glimmers of hope over the last week and a half, we’ve also come much closer to a couple of the proverbial ‘death crosses’…. bearish crosses of key moving averages that suggest a much bigger - and bearish in this case - shift in the market’s broad momentum.

Specifically, the 100-day line (red) is about a day away from falling under the 200-day average (green), while the 20-day line (black) is just a couple of points away from moving below the 50-day moving average line (red). Until we see those two problems undone, even solid bullish hints will be tainted.

That being said, at this point we have to reiterate the importance of the ceiling at 1129 (dashed), which has been a key downside reversal level twice for the S&P 500 over the last three months. Getting above those levels may also unwind the brewing death crosses anyway, so mark your charts there until further notice - it will make or break us

By the way, the lower 50-day Bollinger band (2 SDs) at 1035 is the next major likely floor for the SPX,

S&P 500

The bulk of what was said about the S&P 500’s chart also applies to the NASDAQ’s, and vice versa. So, we’ll not waste time or space rehashing the same points here. Rather, we’ll point out a couple of the NASDAQ’s more unique aspects….. like the fact that it actually closed higher last week, by 6.28% (+0.29%). And, it wasn’t just Friday’s late bounce that pulled off that trick; Tuesday’s and Wednesday’s strength was still better than Thursday’s big dip.

It may seem like a trivial detail on the surface, but given the fact that the NASDAQ leads [both up and down], the small victory offers a legitimate glimmer of hope.

On the flipside, and partially thanks to last week’s indecision, it’s becoming fairly clear that the composite is trading within a range, between 2157 and 2311 (black, dashed). You could actually make a decent case that the lower edge of the range could fall anywhere between 2077 and 2139 (traced by orange lines), but we’ll start with a floor of 2157 given last week’s action. On both sides of the range, however, the Bollinger bands (purple) are starting to squeeze tighter and tighter.

As was the case with the S&P 500, even “a little bullishness” just won’t be enough to do the NASDAQ any good. We need to see this index clear all of its key moving averages as well as 2311 before we can feel comfortable with a bullish outlook. Anything less, and it’s just too vulnerable to a breakdown.

NASDAQ Composite

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No sense in skirting the key issue - new unemployment claims surged to multi-month highs last week, reaching 500K… the greatest number since November, and a clear question mark for the pending recovery.We won’t deny it’s a nasty number. We’ll just ask the question nobody else has….. how many of those new claims were former census workers? Unemployed is still unemployed, but the answer may offer some perspective on the last several months. Interestingly, continuing clams were a tad lower, to 4.478 million.

New, Initial Unemployment Claims

Elsewhere, we saw healthy stability on the inflation front; producer prices were up about 0.2% - much better than the expected 0.5% dip. No deflation yet.

Housing starts were down to 546K, but better than expected. Building permits were down as well, to 565K, which was worse than expected. Don’t over-react though (despite the media’s ability to do so), as this is about the time builders start to slow things down for the year…. a convenient fact ignored by the ‘crash loving’ press.

Housing Starts/Building Permits

The rest of the important news was all in the industrial front…. everything from the NY ‘Empire’ Manufacturing Index to the Philadelphia Fed’s leading indictors. Let’s call it a mixed bag, tough net-positive. The two ‘biggies - industrial production and capacity utilization - rolled in at +1.0% and 74.8%, respectively. Both were improvements, and both were better than estimates. Most importantly, both point to continued economic growth that ultimately fuels bullishness.

Industrial Productivity & Capacity Utilization

Economic Calendar

As for the coming week, much less is in store, though what we’ve got on the plate is big stuff.

We’ll kick things off on Tuesday with existing home sales; they should be lower. New homes sales will be reported on Wednesday. The pros are looking for flat numbers. Though flat = disaster for homebuilders at this juncture.

We’ll also get durable orders numbers on Tuesday, which should be up by 0.5%. Of course, considering the low bar set by June’s 0.9% dip, any upside may not mean much, as it will be easy to muster.

Don’t sweat Friday’s Q2 GDP guesstimate. It’s old news anyway (as we near the third quarter), and it’s still not the final number. If you want something to worry about on Friday, watch out for the Michigan Sentiment Index instead. Experts are looking for a slight dip.

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It would be inaccurate to say the sandbox portfolio was unscathed during the recent pullback; we pretty much got a ‘market perform’. Fortunately, we’ve also matched the market’s recent bound, and as such, we’re still ahead of the game since the portfolio’s inception.

All in all there’s no real room to complain, as the volatile nature of the broad market over the last week-and-a-half hijacked reason and value - we were at the mercy of the market, since normal trading patters and trends were overridden by emotion. Seems to happen about 12 to 18 times per year…. usually short-lived. (If you can catch one of the moves beforehand, it’s a pretty sweet trade. I didn’t catch this one though.)

In any case, the dust is settling, and I expect we can get back to business as usual. Until we actually get there though, I don’t want to make any exits or entries.

Here’s where we are on a stock by stock basis:

News-wise, there’s surprisingly little to discuss. Companhia Energetica de Minas (CIG) just posted earnings. The stock reacted positively to the news. Unfortunately, the stock sank in front of the announcement. The company - often referred to as CEMIG - topped the prior year’s EPS of $0.42 with $0.43 this year, but that was shy of the $0.47 estimate. Still, a trailing P/E of 8.7 is nothing to be ashamed of.

Clearly Shenandoah (SHEN), SeaChange (SEAC), Core mark (CORE), and La Barge (LB) all took on more than their fair share of the recent bout of selling. Each has also hinted at a strong rebound effort though. So, as we said above, we want to let that dust settle before making any buy/sell decision.

And on a side note, small cap utilities, all materials stocks, large cap transportation, and large cap telecom have emerged as leaders over the last month and a half. I suspect most of those trends are here to stay. Some of those areas are represented in the portfolio; some are not. That’s the direction I expect to move towards over the next few weeks though.

Look for more sector rotation and industry strength data in a separate blog entry.

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A few months ago we introduced the Arms Index - or TRIN - as a trading tool that since has not only proven to be accurate, but also multi-faceted; long-termers, short-termers, and everyone in between can utilize its oversold/overbought indications in whatever timeframe is appropriate for them.

Well fans and followers, as unpopular and rare as an optimistic outlook is at this point, our Arms Index analysis says the pump is still well primed for bullishness…. in all timeframes.

We’re not going to get back into the mechanics of the analysis; you can review the explanation by visiting out initial look from April 2nd. We just need to update that chart, and add a couple of comments for today.

The bottom line is, all three Arms Index timeframe tools still say the market is oversold. Each of these respective moving averages remains well above their upper extreme levels. In fact, the long-term (purple) indicator has fallen under its moving average line - the thin line - generating a renewed bullish signal. The intermediate-term signal (blue) is close to doing the same, and may well give us that crossunder buy signal today.

The short-term indicator is the only one that’s still ‘trending’ bearishly, as the TRIN indicator itself is pointed upward, and left its moving average line (the thin red line) behind several days ago….. even before last Wednesday’s big plunge.

This is a critical distinction to make. The short-term trend (as opposed to the long-term trend) is and has been bearish; we’ve never argued that. However, the media and nervous amateur investors are thinking and behaving as if the short-term trend is the long-term trend…. an error that we’ve dissected and warned against many, many times here at the Micro Cap Press. Take a look, but keep reading.

From here, we’d really like to see that intermediate-term TRIN indicator ‘go bullish’ via a cross under its moving average line (the thin blue line). Given its propinquity to it, this could happen as early as today.

And on something of a side [read ‘philosophical’] note, we know being bullish - even cautiously - at this point in time not only puts us in the minority, but also poses the risk of verbal/written jabs about us and our ‘ridiculous’ ideas. That’s fine. We were also ridiculous about the market being overbought and ripe for a pullback in April (when all the TRIN readings were rock-bottom and nobody else cared), yet it happened. We also caught a lot of verbal flack for our bullish stance from July 1st (when all the TRIN readings were sky high and nobody cared), even though it ended up being the right call.

We don’t bring those comments up again to boast, as we’re not infallible. We only bring them up to make the point that emotion-driven decisions are frequently errant, while systematic decisions (based on history) like the ones we strive to make are frequently accurate.

In other words, we take misleading emotions and assumptions that are media-driven out of the equation… something most investors can’t do.

These stances often end up being completely contrarian, and therefore unpopular. Of course, the fact that most investors underperform the market, with a surprising proportion of them actually losing money over the long haul, underscores the reason a contrarian and systematic approach works. Yet, most investors continue to choose to be lead by an inept media.

Anyway, and as always, we’ll update this chart as needed.

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Over the last month and a half or so, I’ve kept close tabs on the market’s earnings results. Now that the season is all but over though, I think we can safely dive into the bigger-picture details of these results - how each sector did in terms of revenue and earnings. 

Surprise surprise, technology is the hands-down winner. Whether you’re comparing Q2’s revenue, operating earnings, or GAAP earnings, more than 80% of the S&P 500’s tech stocks topped each of those prior Q2’s numbers… the best all around results. 

The biggest disappointment came from telecom, though bear in mind there are only nine telecom names in the S&P 500 - it doesn’t take much bad news to significantly impact the overall sector. 

One of the more encouraging surprises was the strength from the consumer discretionary sector. While the media has been hyping up how weak consumer spending is, and how the lack of consumption will be the ultimate demise of the economy, the consumer discretionary (cyclical) stocks continue to rake it in. Odd. 

On the flipside, one of the more discouraging surprises was tepidness from the financial stocks. They need to participate in any rally if it’s to have longevity, but given their weak comparative results last quarter, how can we expect them to rally? This may remain the market’s biggest challenge …. getting the financial sector fully back on board. 

As for what we can ‘do’ with this information, first and foremost take it at face value. 

Take technology for instance. I’ve been bullish on tech for a while; Q2’s numbers confirm my optimism. If we are indeed headed into the double dip that was alleged to have started in the middle of the second quarter, nobody told the tech sector about it. (Cisco doesn’t speak for the whole group.) In fact, tech names are one of the few groups that most of the experts tend to agree on as attractive holdings no matter what the economy holds in store. 

Why? In some regards, technology has become a ’staple’, particularly with corporations. Specifically, I’m looking for stocks in the tech sector that have a recurring or near-recurring revenue model…. things like software-as-a-service, database maintenance, tech support, and the like. Those businesses are at the heart of their clients’ day-to-day operation, and their service can’t just be ‘unplugged’ in an effort to save a few bucks. 

Likewise, you should recognize that utilities and staples are still struggling. If you own any names in those sectors, odds are better than average they’ll let you down. 

No, one quarter doesn’t make a trend. Then again, Q2’s ‘beat’ results really aren’t all that different than the prior quarter’s, and probably won’t be radically different than the third quarter’s either. Just something to keep in mind as you rework your long-term holdings. 

There are other ways to respond to these clues as well; we’ll explore some of them in future editions.

While all other eyes are on the Fed this morning, we thought it would be prudent to take a look at something else…. something else quite interesting about this ‘low volume’ rally that is certainly doomed due to a lack of participation (right?). This low volume/low participation rally has actually not been as low-volume as everyone seems to want it to be.

Yes, that’s right, we finally have clear ‘buy’ signals from our breadth and depth charts, and we have them at a time when we apparently “shouldn’t” have them.

The S&P 500 index is compared to the individual NYSE breadth and depth trends on the first chart. We’ve seen an average - over the last month or so - of 1830 daily advancers versus an average of 1204 decliners. Likewise, we’ve seen average ‘up’ volume of 628 million shares per day, versus average ‘down’ volume of 437 million per day. Take a look.

Like it or not, the trend has been AND IS a healthy one.

Yes, all of this could start to change into something bearish tomorrow, particularly if the Fed pulls the rug out from underneath the market later today. Given just the breadth and depth trends though, odds are good this trend will be sustained for several weeks; there’s a historical context for bullishness here in the shadow of the bullish breadth/depth trend emergence.

Here’s the chart worth the price of admission [our newsletter is free, but you get the idea].… the overlaid version of the breadth and depth trends. This time though, we’ve added markers of where bull/bear crossovers have occurred. The sell signals are the red down arrows, while the buy signals are the green up arrows.

You’ll have to decide for yourself if the buy/sell clues were accurate enough or not. For our money though, it’s kept us out of trouble at the right times - and in the game at the right times - well enough to respect what it’s saying now…. which is that bullishness is emerging.

Note that we may see a temporary disruption (or maybe not) of the uptrend, depending on what the Fed’s got in store for us. As is usually the case though, we anticipate whatever curve ball we’re thrown will be a temporary one, and soon replaced by the current undertow seen in the charts above.

Remember, trading stocks is a “Do as I do, not as I say” kind of game. These two charts tell you want investors are doing, while the media is spinning their wheels telling you what investors are saying.

This is the stuff you need if you want a shot at beating the market, yet it’s something you’ll never find in the Wall Street Journal or see on CNBC. Subscribe to the free Micro Cap Press newsletter today, and start getting the good stuff.

Let’s dissect the economic data from the prior week. There was plenty of it, particularly on the jobs and consumer spending front.

First things first. The economy - technically - lost jobs last month. However, taking out the census workers who were slated to lose their jobs anyway,  we did see a slight gain (in terms of private hiring). We just didn’t see enough. Experts were looking for 83K new private-sector jobs, but we only got 71K new ones.

Aligned with that data, new unemployment claims surged to 479K…. the highest reading in weeks, though bear in mind many of those ‘extra’ initial claims may have been census workers looking for work again. Continuing claims were about average, at 4537K. The unemployment rate, incredibly, held steady at 9.5%, though experts are still calling for a bigger number as the year wears on.

Employment Trends

As for the health of the consumer, income and spending were both flat (0.0%) - pretty much in line with expectations. Hourly earnings and the average workweek were up, by 0.2% and to 34.2 hours, respectively. Both topped forecasts. And, though it still shrunk, the $1.3 billion contraction in consumer credit levels was still better than the anticipated $5.7 billion contraction.

Economic Calendar

This week’s economic news doesn’t start until Tuesday, with productivity and wholesale inventories, though the Fed will also be making some sort of announcement (or non-announcement) that day.  Not much is expected to change on any of those fronts.

Of course, we’ll hear initial and continuing unemployment claims on Thursday; no major disruptions foreseen.

The fireworks really don’t start until Friday (the 13th) though, with inflation/CPI data for July being released. Fears of inflation have slowly melted into fears of deflation, and the trend is indeed pointed in that direction.

Inflation

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The list of attractive micro cap candidates is already getting shorter again. It was only a few days ago - when the bulls were running rampant - that you didn’t have some sort of stock trading idea crammed down your threat every day Now that we’ve slipped back into lethargic land again though, it’s gotten tough to find compelling penny stocks setups.

In times like this though, it’s wrong to assume there aren’t any rising stocks to buy; you just need to change your search methodology.

Rather than follow the penny stock or micro cap news sites or sources, and hope the stocks they’re talking about happen to boast the right kind of chart, you should turn your search around and look for stocks that are rising on growing accumulation - with or without news. Nine times out of ten, that wave of accumulation is a sign that a big momentum shift is underway.

With that in mind, here are five OTC stocks that our routine accumulation scans found. Each is a prime buy-in candidate.

Advanced Life Sciences Holdings, Inc. (OTC:ADLS)   

Don’t be too fooled by the fact that all the bars for the last four days are red; that’s an indication that the close was below the open - not an indication that the close was under the prior day’s close (though some of them were losses for the day). While it would clearly be better to see higher closes on a close-to-close as well as an open-to-close basis, we ARE seeing accumulation of Advanced Life Sciences Holdings… it’s just happening in the middle of the day.

Either way, with ADLS having just made its first close above the 50-day average, the bulls are taking charge here.

Ambient Corporation (OTC:ABTG)

For the longest time it looked like the early-July surge was a one-day wonder, as a ceiling at $0.089 (blue) kicked in after the pullback. Guess not. Today’s move to a close of $0.091 blasted through the resistance line; the high volume rally is yet-another bullish clue. There’s also a lot of room left to recover.

Artificial Life, Inc. (OTC:ALIF)  

At first glance, ALIF looks like it’s just barely off of life support. The longer you look at the chart though, the more compelling it becomes.

The ‘difference maker’ is the 50-day moving average line. Artificial Life closed above it today, and though it’s done so before over the last six months, it was always - eventually - a bearish even to encounter that intermediate-term line. What’s different this time? We have the supporting cast of a higher low (since the July bottom), and strong volume behind today’s move higher.

That said, this penny stock may be one you want to let simmer for a few more days, as it’s still vulnerable.

China Solar & Clean Energy Solns., Inc. (OTC:CSOL)  

This one’s actually (probably) the weakest of the five we’re looking at today, but still worth keeping tabs on. The problem is, we’ve seen moves from CSOL before that look just like the strong move, and none of  them really went anywhere.

Nevertheless, this one’s apt to launch sometime, so put it on the watchlist for now.  Ideally, China Solar & Clean Energy Solutions will settle down and regroup above the $0.35 area, and then start a slower [read ’sustainable’] upward move. Let’s not be presumptuous though.

Daulton Capital Corp. (OTC:DUCP)

Though there’s a distinct lack of volume here with Daulton Capital (welcome to penny stocks), what DUCP lack in activity it more than makes up for with opportunity…. provided you keep your position-sizes reasonable.

In any case, this OTC stock recently turned a downtrend into an uptrend. In fact, as oft today, we now have the 20-day line above the 50-day line, and this stock is even finding support at both those lines now.  It’s simply a trend redirect, with a lot of upside/recovery room ahead.

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Are auto sales getting better or not? It depends on who you ask, and how you measure ‘better’….. yet nobody seems willing to give you a straight answer. Though the industry posts unit (vehicle) sales every month, it’s practically impossible to glean a trend from the data. Why’s that? Because the only numbers you’ll hear are (1) sequential growth (compared to the prior month’s total), and (2) yoy growth (compared to sales from the same month a year earlier). No biggie, except for a few major problems:

• One month’s data isn’t enough information to draw conclusions from (but good luck trying to find multi-month data)
• What if one of the comparison months was skewed, making the growth figure misleading? (and it’s quite common - auto sales are volatile)
• If this is a sequential growth business, then the yoy comparisons are pointless
• If this is a seasonal-based business, then the month-by-month comparisons are pointless

And just for the record, nobody in the industry will really concede if the sequential numbers are the ones to worry about, or if the year-over-year comparisons are the important figures. (And why would they? In so doing, they then lose the option of spinning the numbers into the best possible light each month.)

The Micro Cap Press analytical staff contends that both are telling, but we also contend that we need to see both sets of data for multi-month periods before coming to a conclusion….. which is a tough data set to come by.

Since it’s “worth it” though, and since nobody else is willing to do it, we’ve compiled monthly auto sales going back to January of 2009 - right before the recession technically ended. Take a look, but keep reading. [Click here for a full-screen view.]

It’s a real eye-opener, not just because we can see total industry sales seem to have flattened at levels around last year’s peak sales (though we saw modest gains in July), but also because we can see not every manufacturer has stalled in terms of growth.

Take GM and Ford for instance. While both have found a groove slightly above last year’s average monthly auto sales, both have also stopped growing on a month-by-month basis.

Toyota, despite what can only be described as a recall debacle, has still managed to grow its U.S. business considerably, on a month-by-month as well as a year-over-year basis. So much for the idea that its sticky gas petals would ruin the company’s reputation to the point of unmarketability.

Among the most impressive, however, is one of the smaller players in the U.S. arena. Nissan has seen the most growth (in terms of percentages as well as almost in terms of market share) whether you’re looking at yoy data, or month-to-month numbers. As an example, Nisan owned 9.4% of last year’s total U.S. market share, but so far this year has made up 10.0% of the total market. Year-to-date, Nissan’s U.S. sales are up 19.9%… the best of the six majors.

GM’s U.S. market share shrunk from 25.0% last year to 24.4% so far this year. It’s year-to-date sales are up 10.7%, which is positive, but also in the lower half of YTD growth rates.

On that front, we have to give it up for Ford…. the turnaround story of the decade. It’s year-to-date sales are up 18.1% (second only to Nissan), and its market share for 2010 is currently at 20.9%, up from last year’s 19.7%.

All these trends are obscured by all the monthly noise, and the fact that such trend data really isn’t published…. it’s too messy, even if it’s what investors want/need. The table below un-obscures the whole auto sales story though.

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It’s almost a little comical when you think about it…. the way the market can whip folks around, proving them wrong when they they’re most certain they’re right. In that light - and despite the fact that the futures are pointed lower this morning - we’re going to tentatively say stocks have more upside in front of them. Eventually though (as in two to three weeks), stocks will be headed for a significant dip; it will happen right around the time investors are sure all is safe.

Care to know why we think it’s all going to go down that way?

As was mentioned, index futures are in the red right now… something that could have been expected following yesterday’s 2.0%+ rally. Stocks may even close in the red for a couple of days, but it won’t change the facts that (1) we just saw our second higher high following our second higher low, and (2) the 200-day moving average line is struggling to act as resistance. After a couple days of grappling here, look for the SPX to continue higher and start to press into its upper Bollinger band.

The fuel for the fire is the wall of worry (economy, housing, real estate, slumping consumerism, unemployment, you name it), which stocks are now climbing. Practically nobody thinks it can happen, which if course means it will.

It’s a rally being made on borrowed time though, and at its current pace will run out of fuel - we’re estimating - in about three weeks.

Just for the record, our Arms Index (TRIN) moving average analysis spotted the top in April, and signaled the market was ripe for a rebound in June. So, you have to give it its due props. More importantly, you need to realize that all three moving average are headed lower, and closer to the “too low” mark than most traders may realize. Oh, things are bullish as long as they’re pointed lower. They can’t move lower indefinitely though. Eventually, they’ll all hit their extreme levels…. like they did in April, and like they did in late June.

It’s impossible to know exactly when our three TRIN averages (a short-term, intermediate-term, and long-term indication) will each hit the lower end of its respective range. Odds are they won’t all do it at the same time, a la the June pullback, during which the short-term TRIN reading (red) spotted the short-term highs, while the ‘bigger picture’ intermediate-term (blue) and long-term (purple) Arms Index averages properly stayed the bullish course.

The thing is, we don’t need - or even want - them to all hit their historic low levels at the same time.

As we’ve said repeatedly, understanding the market’s multiple timeframes gives you the power to milk these ebbs and flows, yet avoid getting burned by the inevitable tsunami moves when they come. An example of such a tsunami move is the April pullback, when all three Arms Index averages were at the low end of their ranges and screaming ’sell’. An ‘ebb and flow’ example would be the short-term tops in mid-June and mid-July, both of which were marked by a sharp low from the short-term TRIN indicator (highlighted in yellow).

When/if all thee TRIN averages are at their historical and relative lows (and it looks like we’re headed there), be afraid…. be very afraid. That’s probably about three weeks of though.

And ironically, that should be about the time the vast majority of the market’s participants are gaining enough confidence in the market to start buying again. When they finally zig, that’ll be the time you want to zag.

By the way, we’ve added some moving average line (the thin lines) to each of the TRIN averages [yes, a moving average of a moving average] in order to help us better spot the directional ‘trends’ while not being whipped around by the market’s noise. We’re also experimenting with these moving averages to determine if they can by effectively systemized. We’ll let you know about the results, but either way, those moving average lines really help clarify the TRIN trends and confirm their reversals.

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It was a wild week last week on the sector front, with some new contestants starting to jockey for leaedership roles (and some of them are even making progress to that end).

Utilities and telecom are still out on front, though utilities stocks eased back a bit later in the week, allowing telecom to move ahead for the last three months. Both were and still are ‘must haves’, however, so the shake-up is a little irrelevant.

At the bottom of the pile you’ll find energy is still at the bottom. Though it remains a laggard, our contention remains that these stocks - selectively - are also tremendous opportunities right now.

The most noteworthy (and actionable) leadership switch-up came from the sectors in the middle of the pack. Basic materials, which had been weak coming out of the April/May pullback, saw big progress last week that pushed it ahead of a few other arenas. Yet, the group still has room to move. Coupled with its new momentum, the materials stocks are also quickly becoming ‘must haves’.

Not that one week makes or breaks a trend, but it should be noted that the current performance ranking started to materialize in early June when the market first started to offer a glimmer of rebound hopes. So what? There are two points to make……(1) such trends do persist, and (2) they can be identified, if you just look for them.

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