VOLUME 01: ISSUE 04 Dow Jones 9,057.84 -10.10 4:40 pm EST, Tuesday, October 9, 2001 NASDAQ 1,581.86 -24.09 For info, visit access.smallcapnetwork.com S & P 500 1,058.98 -  3.46 To be removed, please click here. Russell 2000   409.79   - 2.39   To SmallCap Network Members: Thank you for joining us and for your feedback. We appreciate hearing from you. Our last issue offered some general guidelines for effectively managing a micro and small cap stock portfolio. Most of these rules and guidelines apply across the board, whether investing in large, mid, small, or micro cap issues. As a result of Member feedback, please allow us to expand on this topic for a moment. It is important to clarify a very important fact. The same rules apply to successfully managing an individual equity position or an entire portfolio whether in a bull or bear market. When managing micro and small cap holdings, it is sometimes more prudent to accumulate a position over time rather than "jumping in" all at once. (Please note we qualify this by saying "sometimes." NOT "always.") The reason for this has more to do with liquidity, volatility, and other risk factors rather than anything else. Committing 10%, 25%, or 50% of the total capital allocated for one position is an important way to mitigate risk. It's been often said it is not a "stock market" but a "market of stocks." Meaning, even in a declining market it is possible to find stocks capable of producing positive performance. As witnessed through recently released statistics, money market funds are bulging with about $2.2 trillion. This is a definite positive. The current market environment favors certain obvious groups: defense, health care, oil, gold and utility issues to name a few. Through several difficult weeks, defense contractors and companies specializing in advanced security technology have had particularly strong runs. We'd like to clarify for one Member who somehow confused the guideline titled:  "LET WINNERS RUN" with "RIDE THEM UP AND HOLD THEM BACK DOWN." We'll thank that Member for leading to a very good point, however. Investors taking stock should always answer this question before making any investment commitment: "What is the objective in making this investment?" Obviously, the aggressive trader has different objectives than the long-term investor. If the objective is to capture a 10, 20, or 30% short-term profit and the objective has been achieved, TAKE THE PROFIT! If your objective is to position a portfolio for maximum long-term success and a newly established position is down 8%, "Murphy's Law of Investing" says it will probably fall further before recovering. However, when building a position over time, it is easier to live through a 10-20% decline or more, especially if it only represents 1/4 or 1/2 of a fully invested position. Once any new position has been established, setting a MENTAL STOP at a reasonable level beneath the position's cost basis is more than just a good idea. The SmallCap Network strongly advocates the use of MENTAL STOPS to protect profits and limit losses. If you own micro and small cap stocks and aren't using MENTAL STOPS, we encourage you to START TODAY. Many investors aren't aware or don't understand the purpose of using MENTAL STOPS. They are a valuable "tool" in the portfolio management equation. A MENTAL STOP is a predetermined or "set" price that triggers a predetermined action undertaken when trading action hits or breaches that price point, resulting in a partial or complete liquidation of the position. Investors who closely monitor their portfolio can set MENTAL STOPS based on an intra-day price trigger or the stop can be set based on a stock's CLOSING PRICE. For many investors that may be easier to manage. CAUTION: Don't allow the time between sessions to alter the predetermined course of action. The position should be liquidated immediately at the opening of the next trading session. Common sense suggests if a position has performed well and the desired performance objective has been achieved, don't ride the position all the way back down to the cost basis. Raise the MENTAL STOP and protect the profit! If you are not using MENTAL STOPS, your performance results will greatly improve once begin using them. MENTAL STOPS help keep winning positions from turning into losers and losers from turning into disasters. Keeping a written log of the MENTAL STOPS for each position in the portfolio is recommended for making this technique easier to employ. Just do it! VALUATIONS AND AN EVENT DRIVEN MARKET We would like to offer special thanks to Member HBIV, who wrote in regarding our comparison between the early 60's market and today. HBIV managed money in the early 60's and he pointed out that valuations were lower (12-15x S&P500 earnings) in the early 60's compared with those today (around 20x S&P 500 earnings.) HBIV also points out correctly that over-valuation cycles have historically been followed by cycles of under valuation, as witnessed all too painfully since April, 2000. However, technology advancements have enabled companies to achieve higher growth rates in shorter time frames over the past fifteen years. This factor MAY help cushion the market from further deterioration in the weeks and months ahead. With that in mind, we call your attention to the two-year chart of the NASDAQ below. The light blue line represents the 200-day moving average of the NASDAQ and the yellow line represents the 50-day moving average. The tech heavy index is headed towards an inevitable retest of its 200-day moving average. It also appears likely to occur sometime within the next several months. This promises to be a very significant event when it happens. We will be watching very closely to see if, as HBIV suggests, valuations work their way back to more historic norms or the market breaks out and starts working higher again at that juncture. It looked like the NASDAQ was almost ready to attempt a retest before failing off in August. Leading up to the events of September 11, the market drifted towards a retest the lows before plunging sharply after the market reopened and the crisis unfolded. The Federal Reserve and the Bush administration have taken dramatic steps to improve economic conditions and the markets have rebounded since the September 21 low. Now that the U.S. has begun military actions, the risk of events unknown probably sends the market sideways for a few weeks. In the meantime, several important reports on consumer sentiment will be released later this week. On Thursday, September chain store sales numbers will be released and on Friday, September retail sales will be released by the Commerce Department. The University of Michigan releases October consumer sentiment numbers on Friday.  As we've learned all too well anything can happen, so be prepared for action.                           * * * * * * * * * * * * * * * * *  If you'd like to update, change, or add a new email address please click here.     D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker dealer. 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