Penny stock and small cap stock investors may want to get off the sidelines and into the game about right now, if the market has indeed made the bottom many experts think it has. Why? Because the early part of bull markets tend to favor these smaller companies, and by extension tend to reward forward-thinking stock speculators.

But has the market actually hit bottom? Yes, we think it has. We’re not naive to the lingering challenges the economy is facing. But, when the market’s average P/E gets close to single-digit levels, it’s historically been at or near a major bottom.

But what about problems like high unemployment, lingering corporate losses, and a shrinking GDP? Those are fair arguments, but those are issues that the economy and the market have overcome several times in modern history. Though the media would have you think the status quo is permanent, it’s not. Everything is cyclical.

Even with faith in the cycle though, many nervous investors may still want to wait for the economy to find a better footing. While that’s understandable, it’s a mentality that may not be aggressive enough … especially for penny stock traders.

On average, owning stocks from the exact market bottom to a point twelve months later translates into a gain of more than 32%. Waiting a mere three months to step into the same bull market whittles an investors’ gain down to less than 15%.

More important to small cap stock traders, the earliest part of new economic expansions are generally better small and micro cap stocks. After 1990′s recession, for instance, the Russell 2000 Small Cap Index was up nearly 44% in 1991. After 2002′s recession, the small cap index rallied more than 45% in 2003. For comparison, the S&P 500 only gained 26% in both 1991 and 2003.

In other words, small cap stocks – and many penny stocks – have offered the biggest returns at a point in time when few investors were interested in owning any stocks at all. If that somewhat rings a bell, it may be because we’re seeing the same scenario now.

As 2008 transitioned into 2009, the government’s stimulus plan solidified and the stock market began to show signs of new life. And, several penny stocks started to behave accordingly … by rallying.

Take Neoprobe Corp. (OTC:NEOP) as an example. Shares gained 99% in calendar 2008 despite the company not being profitable, yet. The motivation for the buying is what may come next year; analysts are expecting earnings of 10 cents per share. For a stock trading in the 60 to 70 cent range, the forecasted P/E of around 6.5 means the rally could continue into the year.

Basic Earth Science Systems Inc. (OTC:BSIC) is another bulletin board company that may have been unduly beaten up in 2008. Shares fell from a high of $3.04 in mid-2008 to a low of 51 cents by November. The company has remained very profitable though, which may be the reason for the stock’s rebound to as much as $1.00 in January … almost a 100% gain.

Then there’s Gran Tierra Energy Inc. (AMEX:GTE), an exchange-listed micro cap with a market capitalization of only $327 million. This oil exploration company seems to have been unfazed by the severe retreat in oil prices; the company almost tripled its net income between the second quarter of 2008 and the third quarter. Net profit margins are a staggering 34.9%, and the P/E of 8.4 is a bargain by practically any standard.

In simplest terms, the real winners are starting to emerge from the rest of the crowd. And, a large portion of those winners are indeed small cap stocks and penny stocks. The media may be trying to keep investors terrified, but history – and recent results from select micro cap stocks – are offering opportunities for tremendous gains right now.