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Next Steps Following Last Week's Commodity Implosion

What a week it was. The first week in May brought a huge correction in commodities - most notably oil and silver. Trading volume of stocks that explore, pump and mine these commodities exploded, while share prices imploded.

Over the course of the week the price of oil fell by 15 percent. The price of silver fell by 27 percent. Bloomberg reported that the sell-off wiped out $99 billion in market value.

Add to the commodity correction the negative impact on consumers from high gasoline prices over the past few months (it now costs me more than $60 to fill up my truck), a stock market that had reached new highs and a government that is trying to raise its debt ceiling - all while earnings season is going on - and you had a potent mix of data and speculation to drive volatility.

And then of course, it's May.

Like clockwork the market seemed to heed the 'sell in May' cliché that those of us who follow it every day want so badly to ignore. But it's impossible when it happens so regularly.

The best advice I can give small cap investors right now is to let history be your guide. Cut through all the noise in the market right now and expect a period of consolidation over the summer months. There will be fits and starts to be sure, but trading volume is likely to decrease and many stocks will trade sideways.

The recent volatility is the culmination of complacency, and a market that got ahead of itself. We needed a correction, a pause, and some consolidation. Nothing should go up in a straight line - it's just not good.

***Quite honestly, the summer months are my favorite time to pick up shares in great growth companies. While many investors are at the beach working on their tans, I like to average into the best growth stocks in the market when I don't need to fight to get my order through.

Less volume means less attention, and that's generally when we can expect to find good deals.

Don't forget that while many investors may go on vacation this summer, money never sleeps. We're looking to make a lot more of it, and the summer is a good time to get set up for success.

***Speaking of making money, we just sold a stock for a 57 percent gain. The stock was Headwaters Incorporated (NYSE: HW) , a company we picked up at the end of last summer. As I wrote in the sell notice:

"This stock was added to the portfolio as a contrarian play on the housing bust.

When the bottom fell out of housing, the stock followed. We picked up shares on September 24 th , 2010 at $3.23 a share when the company was deeply indebted, but looked to be able to escape bankruptcy.

It has - and we've enjoyed a nice rally in shares. However the company's future at this point is unclear and its three businesses (light building products, heavy construction, and energy technology) make it a complex company to forecast revenues and profits for.

We think there are better places to put money to work now, and the 57 percent gain will mean a significant investment can be made in a new stock with essentially 'zero' risk."

This company actually reported this morning, and the earnings release confirmed that moving on last week was the right call. The CEO commented that higher energy costs were hurting margins, and bad weather had hurt sales.

I was especially pleased to receive the following email from subscriber Rick over the weekend, who wrote:

"I just wanted to thank you for the Headwaters Inc. rec. I played the rec. as a synthetic long (editor's note: this is an options strategy), the first I've ever done, and managed to turn out a 346% profit on it. I have to admit, it's a great feeling to make a profit on two legs of an options play, and even better when one leg paid for the other leg. I could have made more if I closed my positions when HW broke through $6 but it didn't stay there for long...Looking forward to future rec's."

***As I mentioned above, the recent market volatility was overdue. Don't let it shake you from your long-term investing strategy. For me, and for our subscribers, this means sticking to our game plan of finding small cap companies growing revenues and earnings greater than 20 percent, and averaging into positions on weakness. The volatility in the market and in commodities last week doesn't change this one bit.

Until Next Time,

Tyler Laundon

Lead Research Analyst

Small Cap Investor PRO

Disclosure: None

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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