Proactive investors

An Action Packed Week

Stay tuned to the OTC Journal this week- It's going to be action packed. I've heard from a couple of the small stock followings, and it looks like there's going to be a lot of positive news coming this week starting tomorrow and running through at least Thursday.

And, on the issue of the small stocks. Opportunistic is the correct word for making money in these stocks right now. It seems like the market is taking advantage in any surge in liquidity and price to shed shares.

Therefore, if you are going to make money, you need to be a buyer on the low volume pullbacks, and a seller (if you're not a long term investor) on the volume and price surges. UFFC,LEGE, IXEH, OPMG, PKT, and even CGYV has succumbed to selling pressure on the volume and price surges.

If this list of stocks are eventually going to trade favorably, the supply of stock has to dry up, and the breakouts need to hold to set the stocks up for higher levels. We're not there yet, but we're headed there. Despite the charts looking lousy, each of these volume and price breakouts sets these stocks up for better price performance down the road- if and when they deliver the real fundamentals.

Thursday, just prior to the 4th of July holiday, was the first major crack in the market for sometime. As you can see from this chart, the Thursday jobs report, which was abominable, set the market back on some relatively strong volume on what should have been a very quiet day.

But- how much did the market really fall? Here's a chart of the S&P 500 since the market started its rebound phase in March. Note the following- the market surged beautifully in March and April- the S&P 500 made a 38% move from early March to early June- that's a once-in-a-century two month move for the S&P 500.

However, if you look at this chart, you should also note the S&P 500 simply traded sideways for the ensuing 2 months- May and June. In fact, today's S&P is at the same level it was at on May 1st and May 22nd.

After the 38% move, everyone was looking for a correction. Corrections come in many forms- they can be sharp pullbacks, or they can be extended sideways trading.

Now, we've got a little crack in the "Reflation" thesis, and there's a small correction going on. However, the market isn't tanking, and sideline money will start piling in- especially if earnings come in better than analyst expectations. And, speaking of the Reflation thesis........

Reflation- Driving the Market

We've been reflating your portfolio in our large cap ideas, and it's worth taking a look at with the market taking a bit of a breather. Has anyone looked at the Brazil ETF(NYSE: EWZ) of late, which I recommended back on December 13th at $35? It's been as high as $58, and is currently about $50 with the recent sell off in oil. At the high, that's a 66% return in a cash account, 132% in a margin account (less interest).

What's fueling the reflation trade? Fuel is fueling it, or perhaps reflation is the fuel for fuel.

Jed Clampett's black gold- Texas tea- whatever you want to call it. Oil has doubled off the bottom this year. $35 to $70 when all the geniuses getting air time on CNBC were forecasting $20. What's fueling Reflation?

The government's way of stopping the economy from spiraling into the vortex of depression so far has been to pump billions of newly printed dollars into a weak system.

When those banks "too big to fail" and iconic auto companies "too big to fail" began falling, the government printed more money and bailed out many of the companies responsible for getting us in this financial mess in the first place.

Then came the effort to reflate the economy with a $787 billion stimulus package—coupled with a growing deficit—designed to turn America green so we can eventually sever our reliance on oil with the Middle East, rebuild infrastructure and put millions of people back to work.

The Federal Reserve has also lowered interest rates essentially to zero and is on track to pump more than $2 trillion into the credit markets. Around the globe central banks and governments are making similar moves, and investors are beginning to buy into it.

Even though many economies continue to struggle, investors are looking ahead to a time when the massive rescue efforts by central banks and governments gain traction. In fact, the shift from traditional recessionary positions to raw materials and commodity-related stocks has already begun.

Until a few months ago, investors weren't even thinking about preparing for a recovery, hoarding cash and U.S. Treasury bonds and defensive stocks that would perform better than most in a recession. Energy stocks are part of the reflation trade thesis and – down the road -- offer a hedge against inflation. After all, oil is priced in dollars, meaning that as the greenback falls, black gold rises.

Hopes for a second-half recovery have already lifted the price of a barrel of oil to around $69. Just a few months ago it struggled to break past $40. While crude-oil prices are half of what they were last summer after setting an all-time record of $143 a barrel, they are up 100% from their low of $33 hit on Feb 12 and certainly could go much higher. I see oil at around $85 by year's end.

Think about this: If worldwide GDP momentum recovers to its normalized rate of 4.5%, you tap into OPEC's reserve margin of 3 to 4 million barrels a day by at least 1 million barrels a day per annum. China could take up to an additional 500,000 barrels daily. Non-OPEC oil supply has peaked, and right now, exploration budgets stand far below a year ago when oil was pushing $150 a barrel.

As the rally moves forward, that fuels continued optimism in the economy. As we relax through summer and vacation season, energy use grows and that bodes well for the Reflation Thesis, and higher levels in the markets.

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