Stocks Rally Out of a Hole

• Ian Wyatt
• On 5:13 pm EDT, Monday September 14, 2009

Stock rallied out of the hole today. And this has been a pretty common occurrence lately. As I've said repeatedly, the U.S. government is underwriting much of the risk in the stock market. And so nearly any dip in prices is seen as a buying opportunity.

 

The Dow Industrials traded as low as 9,535 before it made an impressive 91-point reversal to close up 21 points at 9,626. The S&P 500 finished with a 0.6% gain and the Nasdaq finished up 0.5%.

 

As usual, though, small caps were the place to be. The Russell 2000 posted a solid 1% gain.

 

The top small cap mover today was Zoom Technologies (Nasdaq:ZOOM). This stock launched an impressive 214% to $12.69 after announcing that its shareholders approved the acquisition of Chinese cell phone maker, Gold Lion.

 

But more than an acquisition, this move appears to be a novel way for Gold Lion to obtain listing on the Nasdaq. After all, Zoom, the acquiring company, does $12 million in annual revenue, is not profitable and has less than $1 million in cash.

 

Gold Lion, on the other hand, did $80 million in revenues in 2008 and $2.8 million in net profit. In the first quarter of 2009, it did $28.8 million in revenue and nearly a million in profit.

 

Before the acquisition was announced, Zoom Technologies had a market cap of $24 million. After today's move, the market cap will approximate Gold Lion's $80 million in revenues.

 

Of course, Zoom was a $1.50 stock at the start of August, so this is a pretty big move overall. I would expect to see some profit-taking. But this might be one to buy on the dips.

 

That's opposed to another top-mover, Heely's (NasdaqCM:HLYS - News). You may have seen a kid or two rolling around on shoes that have a little wheel in the heel. That's a Heely.

 

The stock was up 20% today on strong volume, but I wouldn't be rolling into the stock. Heely's was a $10 stock back in 2007. But I'd say the fad for the shoes has run its course, at least so far as an investment goes. Like Crocs (NasdaqGS:CROX - News), this is one of those one-trick pony small cap stocks you must get into early, or simply avoid.

 

If you want a top mover that may go higher still, check out Bronco Drilling (Nasdaq:BRNC). That stock was up 22% on big volume and no news. That can be a good indication that some important news is coming...

 

*****Today is the one-year anniversary of Lehman Brothers cataclysmic failure. In other words, this time last year, the you-know-what was hitting the fan.

 

Lehman announced it was done on a Sunday. Amazingly, the S&P 500 opened down only a point on Monday, at 1,250. By the end of the day, the S&P had lost 58 points. Stock prices swung wildly the rest of the week. It wasn't until October 7, 2008 that the S&P went below 1,000.

 

It was Monday, October 6, when celebrity investor Jim Cramer made his now-famous Monday "Whatever money you may need for the next five years, please take it out of the stock market right now, this week..." declaration on NBC's Today Show.

 

I always have mixed feelings about Cramer. He's a great showman. But his advice is not always reliable. That day, however, Cramer was right in alerting American investors to what a dangerous situation we were facing. The S&P 500 was trading at 1,097 when he made his "sell everything" call.

 

The S&P is still below that level. So in that regard, Cramer's timing was right.  But he was wrong that that there would be no opportunity for 5 years.

 

******As we've seen, government stimulus efforts have restored stability and confidence to the financial markets. Right now, the only perceived threat to growth is the unemployment rate. All the other bearish catalysts - commercial real estate, toxic assets, rising foreclosures, weakening dollar, inflation - are essentially being ignored.

 

So how much do we discount stocks for the unemployment rate? From its peak at 14,000, can we say the Dow is fairly valued for 10% unemployment at 10,500?

 

Sure, why not?

 

Looking at a 10-year chart of the Dow Industrials, 10,500 doesn't seem outrageous. And I would also argue that at the present moment, there's no need to overcomplicate things.

 

The U.S. government has essentially underwritten all risk in the stock market. That's the basic thesis behind my "Cash for Clunker Stock Rally." I see no reason this rally won't continue. I expect we'll see who still has their circa 2000 Dow 10K hats...

 

******Today is the big day! My first book, The Small Cap Investor: Secrets to Winning Big with Small Cap Stocks hits the shelves today.  Learn more or order your copy from Amazon now.

Buzz up!