Dow Jones 13424.39 +157.66 8:30 am PDT, June 9, 2007 NASDAQ 2573.54 +32.16 For info, visit access.smallcapnetwork.com S & P 500 1507.67 +16.95 Change your subscription status here Russell 2000 835.31 +9.99 VOLUME 07 : ISSUE 56 A 'State of the Small Cap' Address There's no denying it - large cap stocks have led the way so far this year. The Dow is up 6.7% year-to-date, while the S&P 500 is ahead by 5.4%. Their 'on' switch was flipped in July of last year, and with only a couple of blips, they've stayed turned on since then. What about small caps? Like their large cap brethren, small caps have an 'on' and 'off' switch too. For the most part, small caps have been 'off' for several weeks...at least relative to larger companies. It happens. And when it does, it can obviously force an investor to rethink where the best place to find big-movement stocks might be.  To that end, I'd be the first to acknowledge small caps have their own unique challenges, not the least of which is the calendar (as we'll see in a second). With all of this in mind, consider today's edition to be a 'State of the Union' address for small caps....where we are, where I think we're going, and what you may want to do about it.    First Things First  Most if you who've been reading our stuff for a while will probably know I'm a rotation guy. That just means I feel stocks, sectors, styles, and regions tend to fall in and out of favor. A rotational strategy is usually just buying something when it's lagging, and selling something when it's leading.  As you may be guessing then, I assume the euphoria over large caps will eventually taper off, and much of that money will flow back into the recently-sleepy small cap market. It's a cycle that's been playing out since forever. Therefore, I remain optimistic. On the flip-side, I do NOT necessarily expect small-caps to be turned 'on' exactly when large-caps are turned 'off'. Both can be turned off at the same time. I'm distinctly reminded of May of last year, when small caps and large caps both pulled back. That dip lasted through late July, and we may be due for a repeat. After all, spring and summer is a pretty lethargic period to begin with.  A reason to panic? Not at all. I see it as a reason to really get involved and find good companies to own. We've long argued the best time to become an owner of a stock is when nobody else is interested (i.e. when trading levels are low)...which is frequently the spring and summer time. Yeah, it's tough to buy on the way down, or during what seems like a weak patch. Just remind yourself about July of last year when doubt creeps into the back of your head.  Further, I refer you back to a piece I did on April 25th....A Cure For The Summertime Blues. It was then we recognized June was - on average - the beginning of a soft path for large caps, and a potential leadership opportunity for small caps. (That's my way of saying I won't be absolutely shocked if the small cap rebound is soon.)    Interest In Small Caps Still Strong  Here's the piece de'resistance.....a bit of a 'bigger picture' view. I have no problem with ebb and flow, or rotation in and out of small caps. History has shown that given enough time, small caps outperform large caps, and I have no reason to assume that's going to change in the future. My only concern would be if the speculative traders lost interest altogether in small caps. The good news is, the data says they haven't - quite the opposite actually. While most investors are familiar with the three major exchanges (the NYSE, AMEX, and NASDAQ), let's face it - the majority of our trading ideas are bulletin board stocks. To really get a good feel for what's going on in the world of small caps, I think the best course of action is to examine the bulletin board's trading dynamics. There are three key pieces of data I'm interested in as 'proof of life', though all of them are indications of an active small cap interest.  Dollars - In May, $4.3 billion worth of stock transactions were made on the OTC's bulletin board. That was an improvement over April's $3.9 billion, yet considerably less than May of 2006, when $5.6 billion worth of bulletin board trading was done. We've seen slow and steady increases here since August of last year, but we have plenty of room for better numbers than those. Shares - 50.8 billion bulletin board shares traded hands last month. That's much stronger than April's 40.7 billion, but pales in comparison to last May's 68.7 billion. While there's more capacity, those numbers are on the high end of the share counts we've historically seen.  Transactions - There were 1.1 million transactions for bulletin board equities in May, which was just a hair more than April's count. 1.5 million transactions were handled in May of 2006. Again, we're seeing a steady increase in these numbers, so obviously somebody's doing something here.  As far as I'm concerned, the bulletin board is three-for-three in terms of sustained interest in small cap stocks. In fact, all three measures are showing a growing interest in this market, even if the underlying stocks haven't been getting a whole lot of traction lately. With activity levels still strong, eventually (and sooner than later), I think it should show up as price appreciation.    Bottom Line  As I responded to a reader comment on the site's blog Friday, trends come and go - the market rarely moves in a straight line. That's why it's soooo critical to take advantage of opportunities while you can. The last several weeks have been great for large caps, but not quite as solid for small caps. I believe that will change....even if not immediately. That's just the nature of rotation, so it pays to be ready when small caps are back en vogue.  Just to remind you of why the cyclical small cap rallies are (or at least should be) worth waiting for, take a look at the nearby graph. What else needs to be said? When they're hot, they're really hot. And when the rest of the market is cold, small caps give you a better than average chance at upward progress. Over the long-haul, they've outperformed other segments.  And as we studied with the bulletin board's activity levels, there's still heavy trading going on there. Why do you think that is, considering the major exchanges have played host to the biggest winners? I think it's because some investors know there may be more value in small caps, now that larger names have run up so far. I think the slight increase in bulletin board trading is a pre-emptive move, with a whole lot more possibly on the way. If my hunch is right, small caps are well-positioned right now.....undervalued, with a lot of potential 'former' large cap dollars looking for somewhere new to go.  Tomorrow? Next week? Next month? Like I mentioned, I don't particularly expect the next few weeks to be red hot, though I do feel there will be a few big winners from the small cap world. (There always seem to be.) On the other hand, I don't know that I'd take the whole summer off. Nobody really wanted to believe July was last year's bottom until September was over, when it became obvious the bottom had been made two months earlier.  Point being, I think any lull is an ideal chance to go bargain shopping for when the small cap 'on' switch is flipped again.....which may occur sooner than you think.  By the way, be on the lookout this coming Monday for our next edition - we may have an update worth a much closer look. (So far, we've really liked what we've seen from this company.)      We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Email the Editor If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130 Subscribe Information is power and timely information is profitable. Become informed and profit from Small Cap Network Profiles and Trading Alerts by becoming a Preferred Member today. 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