Over the past few weeks I’ve written more and more about technical analysis methods here in Small Cap Investor Daily. I feel it’s incredibly important for independent investors to have a solid set of tools to help evaluate potential investments. Otherwise we’re just following what other people are saying without using our own brains, a sure-fire way to lose money. Independent investors need to think for themselves, and act according to their own research. 

So today I want to talk about another technical indicator – The Relative Strength Indicator (RSI). This is a very easy indicator to turn on when using most finance charting websites such as Yahoo! Finance or StockCharts.com. On Yahoo! Finance, use the Interactive Chart feature and look in the drop-down tab for Technical Indicators. You can set the RSI to the period of your choice. Note that it will be in the same period as the one you select for your chart, days for a daily chart, weeks for a weekly chart, or minutes for a minute chart. I suggest sticking with 14 days and 3-month, 6-month, and one year charts until you become accustomed to using the index. 

What a difference a year makes! On March 30 of 2008 the Russell 2000 was sitting at 512. That’s a full 40% below the high of 856 the index hit in early July, 2007. This year, the index has rallied to 682, and is just 20% below that lofty level from the good old days.

Even more amazing is that on March 9, just a year and 21 days ago, the index hit a low of 343. And it seemed as if the financial markets, and world economies for that matter, would never function properly again. Well, the Russell has moved up 99% since that dark day. And though I don’t think we should expect to see the index regain 856 in 2010, I wouldn’t be surprised to see 750 this summer.

That’s because small caps lead the market during a recovery. Unfettered by overloaded balance sheets these nimble market players can capitalize on opportunities much quicker than their larger competitors. This advantage translates into faster growth, and more rapid share price appreciation.

Nobody wants to admit that oil’s current supply and demand relationship is temporary. Nobody wants to acknowledge that the world faces some tough decisions in the months and years to come regarding energy supplies.  

The era of cheap oil is over. Sure, we could maybe see oil in the $60′s again. But it’s pure folly to expect that oil prices might remain there for any length of time.  

Last week we saw huge spikes in energy stocks. Remember Houston American Energy (NASDAQ: HUSA)? We’ve been watching this small cap oil stock with access to Colombia’s vast oil reserves for well over a month now. And since February 1, the stock is up 120%! That is a massive move, and goes to show that energy stocks still have huge upside potential. 

Right now, global oil production capacity—not actual production—is around 94 million barrels a day. As you can see from this chart, actual production is currently between 84 and 85 million barrels a day. Even when demand was peaking in 2007 and 2008, supply only reached 87 million barrels a day.  

If you read any financial blog or website these days, including the big sites like CNBC will tell you that buying and selling the much hated (and misunderstood) penny stocks can lose you money faster than a slot machine in Vegas.

However, you can win trading penny stocks if you just don’t believe in all the hype.

Friday, March 19th I got an email about a penny stock that I know very well since i’ve traded it successfuly in the past. Lyric Jeans (LYJN.PK) had a few announcements in the press and monsterstox.com was promoting this heavily to their user base which is pretty large. It’s a classic pump and dump that you can use to ride the momentum and cash in on hype.

I bought LYJN.PK at .034 and sold it a day later at .08 for a gain of 235%. The stock then rocketed up to .17 cents the following day and subsequently tanked back down to around .04 cents. During this period, hundreds of millions of shares traded and if you were like me you got in and got out with a profit.

Of course someone is bound to lose out in this situation but then again, they probably weren’t paying attention to the actual hype behind the momentum and didn’t get out on the way up which is what I always recommend. Always lock in your profits, especially after a double or triple.

Happy Trading!

othing is quite as exciting, or rewarding, as investing in promising small-cap stocks – those on the path to growth, profits, and big returns for their shareholders. I love investing in small-cap stocks, those publicly traded companies with market capitalizations of less than $2 billion. But my favorite and best-performing investments of all time have tended to be the smallest of the small caps, with market capitalization of less than $500 million. These are often called micro caps. I like to discover the unknown stock with great promise and strong fundamentals when nobody else has recognized the potential. And I try to buy growth at value prices.  

Sometimes these stocks are not yet listed on the major exchanges like the NYSE, AMEX, or NASDAQ. They may trade on the over-the-counter (OTC) exchange, and I will occasionally invest just before they jump to the major exchanges. To do this they need to pass a number of credibility criteria ranging from minimum stock-price to financial disclosures. While the risk of investing in OTC listed stocks can be higher, so can the opportunity. I’ve invested in both winners and losers, and the gains from the winners typically more than compensate for the duds.  

Stocks have just been ripping higher lately. Sure, there are some ripples as managers steer their companies through the turbulence of an economic recovery. But the trend higher is unmistakable. It’s like there are more buyers of stocks than sellers, and simple supply-demand economics is pushing stock prices to ever higher levels.

When the current seems to be carrying almost all stocks higher, like it is now, I begin to question whether investors are remembering fundamentals. Sure, we know not to fight the trend – that’s a sure way to lose. But we also don’t want to be the last one on the gravy train either. Keep a cool head when stocks are moving straight up, and don’t forget that they can move straight down too. This balanced mentality will help you protect yourself from being that unfortunate last person on the train. But it will also give you the confidence to purchase shares of your favorite companies when shares pull back.

So even though I believe the stock market will continue to run higher in 2010, let’s remain cautiously optimistic. Don’t throw caution to the wind just because it seems that everyone is feeling good about the market’s 70% run higher from the 2009 lows.