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As contrarian investors we are always on the lookout for value. When we say value we mean those stocks that are beaten down and depressed. After all, value must be found amongst that which nobody else wants. In order to find these diamonds in the rough, we use a number of screens / techniques. Amongst them are:
Gazing into the wide expanse of the stock universe we find that in Dollar terms, the US market hase been amongst the worst performer globally (Dow +9% year-on-year). This is most likely due to chronic weakness in the US Dollar instead of the stock market itself. Drilling down even further we find that the wost performing sector by market capitalization has been small caps. Logically, small caps are hardest hit by a weakening economy.
After today's spectacular bounce by the Dow (green circle), coming back from critical support, we reiterate our overall bullishness on the stock market. As we explained in The 100 Dollar Bill drop we believe stocks are about to embark on their next bullish leg fueled by more liquidity injections and rate cuts. Thus begging the question, where should we put our money? Traditionally we favor the Gold and Oil sectors because we believe they are in massive bull markets. But as contrarians we note the US small caps offer tremendous value as they bottom against large caps (chart 1 – MACD and RSI divergences at price lows – green lines). Drilling down even further, the CBS Marketwatch Industry screener shows the 10 Worst Performing Industries over the last 3 months as:
2 sectors we are looking to for the next small cap winners are Business Training & Employment and Mobile Telecommunications. In comparison to other industries they are the least affected by ongoing credit problems. The above approach forms a good basis from which to build a diversified portfolio and take advantage of the next round of monetary inflation.
This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis. CONTACT
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