— “Calling the Trend” Column, by George Leong, B. Comm.
The major market indices are currently trading below key technical levels, as the market correction holds. The downside risk has edged higher and, without any fresh new positive catalyst, we could see more selling in the near term, as markets look for some buying support. The selling last week created an oversold condition, but so far this week, trading has been mixed and there are no signs of a strong bounce. My feeling is that markets could move sideways in the near term until we see more concrete evidence of strong economic renewal in the U.S. and globally. Yes, signs are encouraging, but there is a question regarding the strength of the economic recovery that is bothering traders.
A problem area continues to be the housing market, which remains dismal, with record home foreclosures and late payments. There have been some encouraging signs, but the fact that housing prices continue to fall is an issue due to its erosion of property wealth.
While the third-quarter GDP was strong, the pending drop in government economic stimulus programs could impact spending heading into 2010. The economy still looks too fragile to recover on its own without government help and spending, and this would add to the mounting debt and deficit. American taxpayers will be footing the bill for decades. Our kids will be straddled with a massive debt load.
The key is patience. Longer-term, I remain a firm supporter of buying growth in small companies. There has been some optimism in the small-cap sector after the Russell 2000 broke above 600, but the index has been correcting and is currently down about nine percent from its recent high. The index trades with the economy.
My feeling is that small-cap stocks will continue to outperform in the longer term. The historical statistics reflect this. Short-term trading gains can also be spectacular when the economy rallies.
The key for you as an investor or trader is to monitor a group of small-cap stocks that you like and pick up or add to a position should the stock decline significantly. If you had done this in February or early March, you’d be sitting on some significant gains in many cases of well over 100%. Also look to invest in small companies in both the U.S. and Canada along with other key global growth regions such as China, India, Asia, Brazil, and Eastern Europe. In foreign markets especially in regions outside of China, look at Exchange Traded Funds. For Chinese stocks, there are many traded on U.S. and Canadian exchanges. Buying foreign stocks on Canadian exchanges also gives you currency diversification. As long as you are diversified, you will be fine.
An example of a China-based small company that has made significant short-term profits is China Security & Surveillance Technology, Inc. (NYSE/CSR), which fell to a 52-week low of $2.47 on March 12, but has since been accelerating higher and traded at $8.99 on May 7. It was up a remarkable 264% in about two months or at an annualized return of about 1,564%.
These types of situations occur more frequently than you may think, but you need to close monitor the market on a daily basis and be ready to take advantage of trading or investing opportunities when they appear.