Keep this volatility tip in mind and you’ll be well on your way to profiting from the price swings…

It can be nerve-racking to watch a stock pinball. And if you own shares of any penny stock, you have to be able to spot whether or not the stock is taking a turn for the worse. But wild price swings don’t always mean that there’s cause for concern in your small-cap portfolio.

OTC Is Inherently Volatile

Volatility is inherent in any small-cap stock, but that’s especially true of stocks that trade over-the-counter, or OTC.

And now, with volatility higher than ever on the big boards – like the NYSE and the NASDAQ – as well, the volatility we’re seeing in the penny stock arena is unprecedented. That’s why we need to consider the cause of the volatility, because the reason for a price swing can often tell us quite a bit about where prices are headed next.

First, you need to look at the bid and ask.

The bid – the price that investors are willing to pay for shares – and the ask – the price shareholders are willing to sell shares for – are key parts of how shares of a stock are priced. With blue chips, the difference between the bid and ask price (known as the spread) is tiny, but for penny stocks spreads can be enormous.

Just look at WordGate Communications (OTC: WGAT), which has a 4 cent spread as of Friday morning. With WGAT currently trading at $1.04 per share, that spread represents almost a 4% of the company’s share price – and many OTC stocks have much higher spreads.

That’s largely a product of volume, which is the number of shares that trade hands during trading. Because investors set the market prices of stocks by their buying and selling activity, all any stock needs to make a serious move (up or down) is trading volume. That’s why it’s exciting to find a stock that can make a big move without a lot of extra buying power behind it.

You may have heard a broker or trader talk about a stock that “moves on air.” Simply put, it doesn’t take a lot of extra buying to get shares to blast off. That’s why traders are always looking for “low floaters.” These are the stocks that don’t have a lot of shares that are unrestricted and available for trading on any given day. That’s often true of penny stocks – with relatively low trading volume on any given day, small share transactions can be a major component of share price.

That’s why OTC stocks are so powerful. Little bumps in volume can translate into huge moves in the share price. That was certainly the case with WGAT – shares have rallied 134% in the last month alone thanks to a volume-induced push. And other OTC plays, like IMAGING3 Inc. (OTC: IMGG) have fared even better, pushing 1,580% in the last thirty days.

That’s performance that you’ll only find with bulletin board stocks…

When investor interest returns and volume picks up — thanks to positive news, earnings or guidance — the spread should shrink and the stock should move up nicely.

Just look at the real-time streaming quote generator on your online brokerage site. Type in your favorite blue chip and you’ll see a flurry of activity. Thousands upon thousands of shares will trade in a matter of seconds right before your eyes.

Now type in WGAT or IMGG – two OTC stocks that we’ve been getting quite a bit of reader mail about recently. If it’s a busy day, you could see the bid or ask tick up and down a bit, with a few thousand shares exchanging hands over the course of the morning. But then there are the slow days, when the stock barely moves at all…with a painfully large spread.

That’s nothing to worry about. Just remember this: If there’s no unusual volume backing up a drop, chances are the move won’t hold. Sometimes you’ll see a “shake” — the stock price taking a dive on the sale of just a few hundred shares. Don’t fall into this trap and sell…prices will more than likely return to previous levels sooner, rather than later.

Cheers,
Jonas Elmerraji

Source: Why Volatility Equals Profits for Small-Cap Stocks

With the small-cap research tool I’m about to show you, you’re well on your way to seeing how the market moves ahead of the herd.

Here’s everything you need to know…

A while back, I wrote to you about our Small-Cap Recovery Index. The index is composed of fundamental data from 100 small-cap stocks, as well as economic factors like unemployment and personal savings rate.

It’s designed to give us a glimpse at signs of recovery for the stock market.

While the market has rebounded in a big way since it bottomed in March, many investors are concerned that stock prices are already getting out of whack. But we’ve designed the Small-Cap Recovery Index to go beyond share prices.

Unlike major indexes — like the S&P 500 or small-cap Russell 2000 — ours isn’t a typical stock index. While hundreds of stocks are included in the index, stock prices actually have a relatively small effect on its daily movement. The majority of the index is based on the latest available fundamental performance.

But while gauging how “healthy” the market is can be very valuable, the Small-Cap Recovery Index provides us with considerably more data. In fact, as we continue to watch the index, we hope to use the information it provides to not only peg where the broad market is headed, but which industries hold the keys to growth.

We can accomplish this thanks to the predictive power of small-cap stocks. You see, historically, penny stocks lead the stock market out of recession. “From 1943–2007, according to one analyst, small companies outperformed large companies by more than 50 percentage points in the three years following a recession, including the one following 2001,” explained Ken Kurson in an article published on Esquire.com a few months back.

By monitoring how small caps perform fundamentally and technically, we can essentially predict where more major indexes — the S&P 500, for instance — are headed.

Now, 12 weeks into collecting and analyzing our data, we’ve already caught some indications that the index is doing its job. More on that in a bit…

A Look at the Small-Cap Market

The chart above shows the Small-Cap Recovery Index for the last 12 weeks. The index, which is calculated daily after the market close, is based on a 100 scale — its current value of 107.4 means that the Small-Cap Recovery Index has gained 7.4% since we began tracking it.

While a high number for the S&P 500, which just measures share prices, could suggest that stocks are overvalued, when it comes to the Small-Cap Recovery Index, bigger is definitely better. That’s because a higher number means that the small caps that make up our index are performing well for investors and — more importantly in this environment — performing well from a financial and economic perspective.

In the past couple of months, the index has seen its value increase materially, which is a very good thing. But while the SCRI’s value gives us a good idea of how small caps are performing, it doesn’t do a very good job of actually predicting where the markets will move next. That’s where the oscillator comes in…

The Small-Cap Recovery Index Oscillator

The Small-Cap Recovery Index Oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 — meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down.

We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous to detail here, we’ve determined that if you had used those rules to invest in the ProShares Ultra S&P 500 ETF (NYSEArca: SSO) or the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.26%!

And right now, with the oscillator (the blue line in the graph below) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong — we’re still in the early stages of collecting data and testing its accuracy.

So what’s the SCRI Oscillator telling us right now?

While it’s good that the SCRI has increased in the last 12 weeks, a quick look at the oscillator shows us that the S&P 500 has increased much more quickly — that’s actually a bad thing for the market because it means that investors have overvalued the S&P against the fundamentals of the market.

And already, we’re seeing the S&P 500 start to decline to fall back in line with the Small-Cap Recovery Index. Unless big stocks improve their fundamentals enough to match the small-caps, it’s time to expect a tumble in the S&P back to SCRI levels. We still have considerable data to collect before we begin to use SCRI data in our stock picking methodology, but right now, it’s clear that the index could soon become a very powerful tool in our investment arsenal.

Cheers,
Jonas Elmerraji

Source: The Only Tool You Need to Predict the Market’s Moves

While that may sound like a very specific prediction for a market that’s been anything but predictable this year, thanks to our newest investing tool we’ve got a little bit of added insight into where the market’s headed in the short term.

A few weeks back, I wrote to you about the Small-Cap Recovery Index that Penny Stock Fortunes editors Greg Guenthner, Jim Nelson and I have been working on here at Agora Financial HQ.  The index was designed to use the predictive power of small-cap stocks and leading economic indicators to give us some clues as to when we might get our first glimpse at economic recovery.

That’s because historically, small-caps lead the way out of recessions. When big stocks are still in the throws of economic trouble, the smallest, most nimble companies are already climbing into prosperity. And as we gather data, we’re on the road to seeing just how well our index will be able to use that knowledge to our advantage.

Here’s the first look at our index so far:

For the last few months, our database has been compiling market and economic data daily, and establishing the baseline that we’ll be using to analyze the market at large. It’s exciting stuff, and just two weeks ago it became even more interesting…

In addition to predicting where the economy is going, we’ve been experimenting with the predictive ability of our Small-Cap Recovery Index on other parts of the stock market.

To that end, we’ve recently been taking a look at the Small-Cap Recovery Index Oscillator. The oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 – meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down. And thus far, our expectations have been met:

Here’s where things get interesting… We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous – and boring – to detail here, we’ve determined that if you had used those rules to invest in the ProProShares Ultra S&P500 ETF (NYSE: SSO) or the ProShares UltraShort S&P500 ETF (NYSE: SDS) depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.52%!

And right now, with the oscillator (the blue line in the graph above) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong – we’re still in the early stages of collecting data and testing its accuracy.

So far, though, the Small-Cap Recovery Index Oscillator has been incredibly precise with its buy and sell signals. If it’s right again, it’s time to get back into shares of SDS.

Cheers,
Jonas Elmerraji

Source: Scoring 36% Gains in Six Weeks with Our Favorite Small-Cap Tool

You see, as a small-cap investor, you’ve got very different concerns compared to those who only buy and sell blue chips. One of those concerns is order execution. And most likely, it’s something that you haven’t heard about anywhere else…

That’s because for the most part, order execution is a term that’s relegated to the big players – firms like Goldman Sachs and T. Rowe Price that have teams devoted solely to proper order execution. But penny stock investors have many of the same order execution concerns on tiny, thinly traded stocks that the big Wall Street firms do with companies like GE and Microsoft (NYSE:MSFT).

But before we get down to brass tacks, let’s take a look at what order execution means…

Order execution is the process that swings into action when you try to buy or sell a stock. When most investors place an order with their brokers, execution is nearly instant. But when small-caps are concerned, thin trading volume can play havoc with share prices and with your profit or loss.

It’s important to remember that as its name implies, the stock market is a market. That means that stocks move based on supply and demand, and not necessarily their intrinsic value. While that works well for heavily traded stocks like Exxon Mobil  (NYSE:XOM) or Wal-Mart (NYSE:WMT), where thousands of investors keep shares around their fair value by buying and selling millions of shares each day, some small-caps only trade a few hundred shares during any given trading session – some trade even less than that.

As a result, penny stock share prices can sometimes deviate pretty far from where they should be. And while that can provide prescient investors with a whole lot of profit potential, it can also be a big problem for those who don’t protect themselves.

Understanding Bid-Ask Spreads

Like mentioned before, stocks trade in a market. In markets, prices are set by the participants – in this case individual and institutional investors who buy and sell shares of stock. There are two pieces of price information for any stock: the bid, which represents how much investors are willing to pay for a stock, and the ask, which represents how much current shareholders are willing to sell for. When those two numbers intersect, a trade happens.

The bid and ask aren’t hypothetical numbers – they represent real outstanding orders.

For any stock, there’s a separation between the bid and the ask, knownas the spread. If someone’s willing to sell shares of Bank of America (NYSE: BAC) for $16.84 and another person’s wiling to buy shares for $16.83, your bid-ask spread is one cent. The spread is kept small by the large number of traders in the stock, who volley back and forth maintaining a tight range for BAC’s share price.

But for a stock that’s more thinly traded, spreads can be huge. That’s a big problem for small-cap investors because a spread that span’s 2% to 3% of a stock’s share price can essentially shear that kind of performance from their position from the get go.

And starting out 3% in the red from the second you buy shares of a stock isn’t a good deal…

When you’re missing out on 3% of every trade, that disadvantage begins to add up big time. But follow these three secrets, and you can ensure that you’re making out on your small-cap trades:

1. Love Liquidity

The best way to avoid being burned by a lack of liquidity is to only trade stocks that have enough trading activity to keep share prices in a reasonable range. And while that may sound limiting to some investors, the truth is that there are ample investing opportunities in small-caps that still see decent trading volume on the market.

As a general rule, if a stock doesn’t trade thousands of shares during any trading day, it’s best to keep your distance.

2. Use a Limit Order

Market orders are a bad idea for small-cap investors. That’s because they automatically execute at the price necessary to make a trade, meaning that every time you initiate a market order to buy shares of stock, you’re rising up to meet the price the seller wants. With huge spreads common in small-caps, market caps are a sure way to lose money from the get go. Instead, use a limit order.

Limit orders are essentially market orders that only execute below a certain price when you’re buying shares, or above a certain price when you’re selling. They’ll help ensure that your entries and exits are happening at prices you set, not the other party.

3. Beware of Promotions

Stock promotion is a popular way for small-cap companies to increase daily trading volume. The practice, which often employs dubious ethics, involves hiring firms that spread good news or sentiment about a tiny stock. But being on the wrong end of that strong sentiment can be a very bad thing. Since volume in small-caps is often so thin, the huge volume surges caused by stock promoters can sometimes move a stock’s share price by more than 20%.

To avoid getting into stocks that are being manipulated, check out promoters’ favorite places – investing message boards and press release websites – for over hyped language that goes beyond what one of the company’s shareholders would spout off. If you see the same language in multiple locations, chances are that a promotion is underway.

The stock market is a tricky enough place to operate. After all, there’s no way to guarantee that the next stock you pick will deliver 100% profits. And there’s no telling whether the company you just added to your portfolio is a sure thing. But even with all of that uncertainty, you don’t have to give away your gains before you place a trade. Now you’ve got three ways to make sure that order execution mistakes don’t squeeze your profits.

Cheers,
Jonas Elmerraji

Source: 3 Secrets to Profitable Small-Cap Order Execution

Tuesday morning on CNBC’s Squawk on the Street, anchors Mark Haines and Erin Burnett featured commentary from Phil Roth, Chief Technical Analyst at Miller Tabak. Roth explained that investors shouldn’t be fooled by the recent rally we’ve seen since the market hit its March 9 low of 666.79 – until stocks test their current levels, we could be seeing a bear market rally that could easily give back some of those gains.

CNBC’s Mark Haines was outraged. “The market’s moved more than 20% higher off the lows… 20% or more is a bull market. The benefit of the doubt has to go to the bull market,” exclaimed a frustrated Haines after Roth discounted the anchor’s opinion.

Who’s right?

Forget about what’s happening on TV – to make an informed opinion, we need to check out a chart…

Above is a look at the S&P 500 from last summer (before the market crumbled beneath us in October) to present. What’s initially clear from the S&P’s price action is the fact that between market bottom on March 9 and May 8 the movement was almost exclusively up.

That’s no surprise given just how oversold the market was in March.

Ever since then, the market has traded flat, bouncing around in a channel, and making investors sitting on gains from the last few months very nervous.

What should make investors more nervous is the potential for a bearish “head and shoulders” pattern forming on the S&P right now…

If the S&P decisively breaks through the shoulder level above, we could easily see a drop to around 852 before it encounters any kind of support. Luckily, the downside risk is relatively shallow right now, but that could change alongside market conditions.

This week, we’ve seen a slew of negative reports that seem to indicate the economy isn’t quite as strong as many investors thought – jobs numbers were dismal on Monday alongside slipping oil prices for starters. As earnings season kicks off, good income numbers could be the only thing that keeps us from tumbling further… more on that in a minute…

Taking on Multiple Timeframes

One of the strongest technical confirmations of where the market’s going can be found by looking at multiple timeframes. While things look nasty on the 12-month chart we looked at above, how are things positioned shorter-term?

Over the course of the last two months, the bulls have clearly been losing ground through two increasingly drastic downward movements. That seems to suggest that our medium-term downtrend is holding in “bear mode”.

While the possibility that we’ll experience a new market bottom is doubtful at present, the possibility that the stock market will continue to fall over the course of the next month or two is quite likely.

Making Money with ETFs

Even though things look unappealing for most companies’ share prices right now, there is a glimmer of hope for investors who want the rally to continue.

It’s earnings season, and strong numbers from a few of Wall Street’s darlings could do a lot to change investors’ fortunes. Right now, the economy’s fundamentals are weak, and earnings expectations are muted. If big names on Wall Street can beat analyst expectations, it’s quite likely that the market can put the brakes to its slide.

That said, there are plays to be made regardless of where the market’s going – and ETFs provide one of the best ways to pull down gains right now.

ETFs – or Exchange Traded Funds – are essentially baskets of securities that trade on major exchanges. Think of them as mutual funds that trade like stocks. But unlike mutual funds, ETFs can get you a part in almost any market imaginable… Even commodities like gold and oil, and emerging market stocks.

I’ll let you in on some interesting ETF strategies in the coming weeks. Until then, I’ll continue to keep you updated on what’s going on in this wild market.

Cheers,

Jonas Elmerraji

Source: Is the Market Bound for Another Bottom?

“In an age of global water scarcity, with governments scrambling to create new water systems or repair deteriorating ones, there is money in water,” he says. And Emmons isn’t the only expert who thinks water is soon to be a very valuable commodity. “Water is going to be more important than oil in the next 20 years,” predicted Dipak Jain, dean of the Kellogg School of Management at Northwestern University, to Bloomberg.

That’s thanks in large part to your local water utility. While cities and municipalities run 85% of water utilities, there are scores of for-profit companies left over to turn water into cash.

Utilities have become popular with investors in recent years for two reasons: stable sales and dividends. In most places, electric, gas and water utilities are highly regulated by the government, and they’re often allowed to operate as pseudo-monopolies in their markets. Couple that with the relatively level demand of utility customers and you have a recipe for fairly predictable sales numbers from quarter to quarter.

Utilities are also among the best dividend-paying industries.

But while that’s proved to be a great combination for investors who are looking for slow growth and slow income, growth-hungry small-cap investors have typically eschewed utilities for those very reasons. Until now…

Claim Your Stake in This Water Utility Stock

We’ve recently caught wind of a small-cap water utility based in the U.K. The company provides water and wastewater services to more than 4 million customers in seven countries. The company’s international exposure is what makes it especially interesting for investors looking for high growth – by entering new markets, the company managed to grow its sales 10 times faster than the rest of the industry.

Our unique water utility investment focuses on providing water services to developing countries with quickly expanding water needs. In addition to the U.K., the company has operations in South Africa, Indonesia, China, Chile, Panama and the Philippines. And in the last year alone, it’s managed some impressive milestones.

In China, a country where a quarter of the population doesn’t have access to safe water, the company secured two new projects that will eventually serve a combined 1 million people. It announced record new connections at its local subsidiary in the Philippines. And one of this utility’s biggest new South African customers is the new FIFA soccer stadium currently under construction – the stadium will be home to the World Cup in 2010.

Why This Stock Could Jump 166%

From a value perspective, we’ve got our eye on an impressive stock. Of all the small-cap water utilities currently trading, this company has the lowest P/E ratio. That means that you’re paying less for each dollar of our stock’s income performance than you would for any other company in its class.

The average P/E for profitable water utilities right now is 23. For our small-cap utility to trade at the average, its share price would be $9.70 – a full 166% gain from where it is now.

Part of the reason for that is the low profile the company has taken since it went public. This company’s shares weren’t traded on U.S. markets until the beginning on 2008, just as the stock markets were starting their yearlong descent. As more investors become aware of what this company is capable of, you can expect its share price to make its way back toward the $5-10 range.

To get access to the water utility in question, visit the Penny Stock Fortunes website.

Cheers,
Jonas Elmerraji

Source: The Water Utility Poised to Jump 166%

But as the markets work their way back into health and investor confidence continues to creep up month after month, we risk throwing away the lessons of the Subprime Crash of 2008:

Lots of very intelligent investors got embroiled in huge losses last year. Bernie Madoff fleeced scores of wealthy, well-informed investors – many of whom lost everything they had built up over a lifetime. The collapse of some of the biggest financial institutions, including Lehman Brothers and Bear Stearns, thinned out the Wall Street crowd by the millions. And underperforming fund managers hit close to home by taking a bite out of out 401Ks.

In fact, over the course of the last year, the average mutual fund lost 20.95% of its value according to Morningstar. That’s a shock for investors who were used to raking in double-digit gains year after year.

If nothing else, there should be some pretty big takeaways from this financial fiasco. Here are three that you should be walking away with:

1. Know What You Own

Knowing what you own is one of the tenets of stock investing. But it means more than being able to name the holdings you have in your portfolio. In late 2007 and early 2008, the general consensus on stocks was that the bullish tone of the market was set to continue.

But in reality, stocks had been expensive for quite some time. Just how valuable were stocks before the bottom fell out of the market? Here’s a look at historical P/Es of the S&P 500 every quarter since 1936:

The consensus is generally that the average P/E of the S&P 500 is around 10; it’s not. Since 1936, the S&P 500 has averaged 15.8.

But in late 2008 the S&P’s price to earnings ratio had risen to the mid 20s. In fact, they hadn’t touched that 15.8 average in 13 years. For the first two quarters of 2008 before stocks went into freefall, the S&P’s P/E ratio averaged just over 23… 45.5% higher than the historic average.

Now, there are a lot of reasons why the market should have a higher P/E than it has in the past – constituent companies have changed pretty dramatically in the last 73 years, for starters – but that still doesn’t explain why companies delivered investors with 39% less earnings bang for their buck between 2005 and 2008.

The information suggesting that the market might be overvalued was easily available, but the investor sentiment told us to buy full steam ahead.

2. “The Market Can Stay Irrational Longer than You Can Stay Solvent”

That famous quote from economist John Maynard Keynes resounds just as true today as it did in the 1930s. Keynes was qualified to make a statement like that – he was one of a few prescient investors who made a fortune by avoiding the great depression, and picking up undervalued stocks dirt cheap in its aftermath.

Markets tend to overreact to important news. They overreacted to the subprime crisis by slashing stock prices by an average of almost 50%, and they’ll likely overreact again as we recover from March 9’s market lows.

Those overreactions are only magnified when it comes to penny stocks. Because the smallest companies have the smallest trading volumes, their true values and share prices are often not reconciled. And while that can provide penny stock investors with a huge buying opportunity, it can also provide us with a huge headache as we wait for our valuations to come to bear.

3. Don’t Believe the Hype

The mainstream financial media deserves a share of the blame too… Traditionally, the tone at the major financial networks has been pretty predictable – their pundits sing the market’s praises when things are good, and solemnly decry the dangers of stock investing when things turn sour.

And as the first signs of the subprime collapse started rearing their ugly head, the pundits were in full perma-bull mode…

It’s time to take what we hear on the financial news with a grain of salt.

Cheers,
Jonas Elmerraji

Source: Three Lessons Learned from the Subprime Crash

While safe, stable stocks are usually the first place investors flock to when markets turn sour, maybe you should be taking another look at penny stocks. As “blue chips” like GM and AIG crumbled under the strain of the credit crunch, a large number of penny stocks were making a small group of investors a fortune.

If the true test of an investment is a bad economy, what better time was there to demonstrate that theory than the last 12 months? Over the course of the last year, we’ve seen the market falter, absorb bad news, and crash harder than it’s fallen in three generations. And while stocks took a big hit across the board, here’s a look at the small stocks that fared well:

A Mix of Businesses

The stocks listed above have been limited to the highest performing small-caps over the last 12 months that have a decent trading volume. As you can see from their names, there’s a pretty varied mix of businesses in the group…

Like Explorations Group (OTC: EXGI), a company that acquires and manages parking lots and garages in New York City. Or Zagg (OTC: ZAGG), a company that makes protective coverings for iPods that I mentioned here in the Penny Sleuth last week.

While there isn’t any single industry that rules this list, these stocks actually do have something important in common – they each have real, revenue-generating businesses.

That may sound like an obvious thing to look for in a stock, but in the penny stock universe, it’s not uncommon to run across hundreds of shell companies that actively trade over-the-counter. Some of those shell companies have plans to enter some exciting businesses; others are a money pit for investors who are willing to believe their hype.

Getting Your Stock on Next Year’s List

If you want to dodge the hype and find a penny stock that will make next year’s list, here are a couple simple rules to keep in mind…

For starters, only invest in penny stocks that have a real, revenue-generating business. It’s true that people have made millions by speculating on long-shot penny stocks, but more people have gotten burned trying to recreate their successes.

And know when to sell… Lots of penny stock investors see 200%, 500%, even 1,000% gains on a stock but still end up losing money in the end. It’s not because they didn’t plan their buys properly…it’s because they got greedy!

It doesn’t matter how much money a stock makes if you’re not ready to press the button and realize those gains. That’s why you need to set solid exit points for any penny stock you buy.

It’s human nature to want to hold onto an investment as you see it climb with no end in sight, but doing that is a great way to miss out if that trend turns around. When you analyze an investment, think about a logical exit price and sell for that. Picking solid exit points will become easier as you develop your investing chops.

Cheers,
Jonas Elmerraji

Source: This Year’s Top 10 Penny Stocks

The widespread acceptance of the Internet has lead to a monumental shift in the way we do almost everything. Communication now happens instantly across thousands of miles, e-commerce has generated billions of dollars for companies like Amazon.com (NASDAQ:AMZN) and eBay (NASDAQ:EBAY), and, with the advent of search technologies like Google (NASDAQ:GOOG), the planet’s information is at our fingertips.

But in spite of these advances, something was missing…

After all, why should you have to scour pages and pages of Google results to find out which country is the world’s 5th smallest exporter? How is it that that sort of factual information isn’t readily available? In the past, search technologies had a big limitation – they required you to ask a question that’s already been asked and answered. But on May 15, with the public release of Wolfram Alpha, that all changed.

Wolfram Alpha is a computational knowledge engine. What that means is it answers factual questions based on structured databases that catalogue information. And it’s creating quite a stir among technology experts.

“[Wolfram Alpha] doesn’t simply return documents that (might) contain the answers, like Google does, and it isn’t just a giant database of knowledge, like the Wikipedia. It doesn’t simply parse natural language and then use that to retrieve documents… Instead, Wolfram Alpha actually computes the answers to a wide range of questions,” said Nova Spivak in an article posted on Twine, a social networking site.

So, if you really do want to know what the 5th smallest exporter nation is, or the average salary of a school bus driver, or what 20/200 vision looks like, with Wolfram Alpha the answer is truly only one click away… without having to rummage through search results.

Not a Search Engine

The most critical thing to remember about Wolfram Alpha is that it’s not a search engine – it’s an answer engine. While searching for “penny stocks” will yield you 5.7 million results on Google, Wolfram Alpha won’t return a single web page. Where Wolfram shines is in answering factual questions (asking subjective questions like “which car is cooler” won’t get you much success).

So, enter something like “What is the circulation of the Wall Street Journal?” or “What is the density of milk?” and you’ll get your answer (2.012 million readers and 242 g/cup respectively).

The most important thing about Wolfram Alpha isn’t what it’s capable of right now, it’s how the unique way it handles data makes big advances possible in the future. “Where Google is a system for finding things that we as a civilization collectively publish, Wolfram Alpha is for computing answers to questions about what we as a civilization collectively know.

It’s the next step in the distribution of knowledge and intelligence around the world — a new leap in the intelligence of our collective ‘Global Brain.’ And like any big next-step, Wolfram Alpha works in a new way — it computes answers instead of just looking them up,” explains Spivak.

Putting Wolfram Alpha to Work for You

And as an investor, Wolfram Alpha has some abilities that transcend the potential of its technologies. With this platform, you can instantly get a slew of financial information on a stock just by typing its ticker into Wolfram’s engine.

You can also make interesting computations on the fly, like this chart of GM revenues divided by Ford’s revenues:

If you’re interested in options, bonds, or currencies, Wolfram Alpha also has the ability to make complex calculations (like the value of a straddle option) instantly for you.

Keeping an Eye on the Future

There’s little question that the work the folks at Wolfram Research are doing on Wolfram Alpha is going to change the way we interact with data. I think it’s clear that those changes are going to trickle down to make data more available to investors – and they’re also going to fuel huge growth for the handful of companies who are working on computational engine technologies. Visit wolframalpha.com to check out this amazing new technology for yourself.

Unfortunately for us Wolfram Research is a privately held company, but there are other plays in the field. We’ll keep you posted as they make their moves.

Cheers,
Jonas Elmerraji

Source: Get a Glimpse at the Next Google

This week, Solarwinds (NYSE: SWI) became the first venture capital-backed initial public offering (IPO) in more than nine months. That’s a significant event for those who watch the IPO market… it’s also significant for the rest of us – after all, IPOs can be a pretty good indicator of how the stock market is turning.

And in 2009, things haven’t been turning very fast…

In the first quarter of 2009, there were only two new IPO deals done globally; that’s compared to the 100 deals done in the first quarter of 2007. It wasn’t for a lack of eligible companies either: all told, 26 firms withdrew or postponed their initial public offerings this year. That’s no surprise given the global economic slowdown that started last year.

When companies are considering going public, how the market’s faring can have a big effect on them. That’s because the market dictates just how much capital a newly minted stock is able to raise. Investors in bear markets are a lot less likely to pony up as much cash to buy and IPO stock than those who are investing during a market rally. And studies have shown that the owners of private companies going public (venture capitalists and entrepreneurs) are much less likely to start the expensive underwriting process when times are tough.

Things haven’t been helped by the shakeup in the investment banking world. Since the financial meltdown started, some of the biggest underwriters (the firms that help take private companies public) have closed up shop – Lehman Brothers and Bear Stearns among them.

A Turnaround for the IPO Market?

Despite all of the barriers to new public companies right now, it looks like the IPO market is starting to catch some momentum once again. While Solarwinds may be the first venture-backed IPO in three quarters, it’s far from being the first IPO in 2009.

Since January, six large IPOs that have taken place in U.S. markets. Of those six, four have gone public in the last five weeks… That’s a pretty substantial increase in tempo.

And while other economic factors send mixed messages to investors on a daily basis, the warming up of the IPO market is one signal that’s decidedly bullish.

Small-Caps Lead the IPO Rally

Of the six new issues that have hit the markets this year, every single one has been a small cap. The names include highly anticipated offerings like language software developer Rosetta Stone (NYSE: RST), satellite imaging firm Digital Globe (NYSE: DGI), and for-profit college company Bridgepoint Education (NYSE: BPI).

Overall, these IPOs are a big win for small-cap investors. Not only do they provide exciting opportunities to invest in companies that have until now been private, they also suggest that the markets are receptive to a continuation of the rally that took a break last week.

Cheers,
Jonas Elmerraji

Source: Selling the Solarwinds IPO