Small Caps Will Lead The Way Before Blue Chips Do!

The demand for foreign-made cars, computers and clothing widened the U.S. trade deficit for the month of May.  This is the highest level in 18 months.

The trade deficit increased 4.8% to $42.3 billion.  This is the largest imbalance since November of 2008. American exports of goods and services rose 2.4% while imports rose 2.9% and outpaced them by .5%.

American manufacturing has been outperforming other industries and benefiting from a global economic recovery. But the concern is that export sales will be hurt by the European debt crisis.  The Dow collapsed when Greece was downgraded but yet it held up strongly against the Portugal downgrade.

Through May, the U.S. trade deficit is running at an annual rate of $474.8 billion, up by 26.6% from the 2009 deficit of $374.9 billion. That was the lowest annual trade gap since 2001.  Ironically the country was in a recession as well that year.

The rise in the May deficit came even though oil imports had dropped by 9.1% to $27.6 billion.  We saw both the price of oil and the volume of shipments decline.

The deficit with China rose to $22.3 billion.  This is a 15.4% spike from the April deficit. So far this year, the U.S. deficit with China, the largest imbalance with any individual country, is up 10.2% from the same period a year ago.  Many bankers and currency traders feel that the Chinese Yuan is grossly undervalued by almost 50%.

How does this affect small caps and penny stocks?  There is no set formula to the markets.  You often hear that when gold is up, the dollar is down or the market is down gold is up etc.  This is not always the case.  Let’s take your typical investor.  He may have purchased a few hundred shares of British Petroleum (BP) for his retirement account.  In the meantime he may have a few thousand dollars of speculative money that he is willing to risk on a speculative investment such as  hot penny stocks.  He is more inclined to sink that money in penny stocks if his investment in BP is doing well.  The whole Dow got crushed until recently and people who thought their money was safe in Blue Chip companies were severely damaged.  Multiply this by millions of people and we have a dilemma.  This takes away from speculative investments.

The general rule of thumb is that small caps lead the blue chips out of recession by a year.  Who knows if that rule will hold true.  The fact is that you can always find a penny stock that has doubled in a day…. The trick is finding it before it has doubled.