Market Report: March 18, 2013 – Well, “it” finally happened. “It” being a downward spike for the Dow Jones Industrial Average. After a daily winning streak that had built to about two trading weeks, the blue-chip index finally closed lower on Friday, though only modestly so. Still, it should be noted the Dow climbed to an eighth consecutive record high on Thursday.
Also on Thursday, the S&P 500 traded within two points of its record closing high of 1,565.15 set in October 2007. For the week, the S&P 500 added 0.61% while the Dow and the Nasdaq Composite also participated in the upside.
Downward spike… a word of caution… make that two words!
At the moment, there is not much in the way of downside catalysts, but the rally does have its naysayers. For example, Jim O’Neill, chairman of Goldman Sachs Asset Management, said in an interview with Bloomberg that U.S. economic growth would have to surge to “ridiculously strong levels” to justify any advance for the S&P 500 above 1,600.
The 1,600 level is a mere 40 points from Friday’s close.
Another note of caution was presented by Will Deener, financial columnist for the Dallas Morning News who wrote, “With the Dow hitting new all-time highs almost daily, investors worry that a downward spike is coming. That’s certainly a possibility.
“Since this bull market began four years ago, corrections of 5 percent or more have arrived like clockwork – one almost every four to six months- with the last one occurring in November.”
MicroCaps continue to move up
Importantly for those of us who cover the smaller stock sector, micro-caps, a fairly accurate gauge of risk appetite, continue to grind higher. The iShares Russell Microcap Index Fund (NYSE: IWC) added 0.72% for the week while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) climbed 1.2%.
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That picture was too good to last
That picture being the “all green chart” we had last week. The majors all close up for the week with the Dow gaining 0.81%, to close at 14,514.1, followed by the NYSE Composite and S&P 500. The laggard was the NASDAQ which was off two of the five trading days and closed up a modest 0.14%.
However, the NYSE MKT (AMEX) which closed up strongly on Friday, + 0.85% could not overcome a 2.12% loss on Wed and finished the week in the red along with the NASDAQ Golden Dragon China Index (-2.49%) and the Emerging Markets (-2.01%).
The Russell 2000 Index continued its winning ways… adding a +1.22%% this week to back up last week’s 4.32% gain. It’s up 12.27% YTD and moved slightly ahead of the Russell Micro YTD gain of 12.18%.
Oil prices continue to move higher
WTI Crude Oil gained $1.50 this past week to close at $93.45. The price of oil rose 42 cents on Friday and gained 1.6 percent for the week. ABC News reported the increase was “on signs of improvement in the U.S. job market and manufacturing sector. On Friday the government said a strong increase in auto output boosted U.S. factory production by a seasonally-adjusted 0.8 percent last month.”
The Dollar weakened slightly… losing $0.0043 for the week to close at 0.7647 euros.
Bonds were up
The 10-year bond gained $0.52 to close at $100.02 while the 30-year bond gained $0.58 to close at $978.13.
Gold bugs win three weeks in a row… Gold gained $15.90 to close at $1,592.50. A weaker US dollar was a catalyst for gold rising three weeks in a row along with renewed fears of early signs of US inflation.
On the economic news front, the week was not as brisk as it was last week, but there were still a few important reports to be digested. The Commerce Department said U.S. retail sales rose 0.6% last month. Core sales, excluding gasoline and construction sales, rose 0.4%. Auto sales climbed 1.1% after rising 0.4% in January.
In a separate report, the Commerce Department reported that business inventories rose 1% in January, the biggest increase since May 2011. The January reading topped December’s reading of a gain of 0.3%. Economists expected a January gain of 0.5%.
Jobless claims surprise to the down side
Initial claims for jobless benefits fell last week by 10,000 to 332,000 claims. Analysts expected an increase to 350,000 claims. The less volatile four-week moving average fell by 2,750 to 346,750.
The Labor Department said its seasonally adjusted producer price index rose 0.7% in February following a 0.2% increase in January. Core PPI which excludes food and energy prices rose 0.2%, in line with economists’ expectations.
US Consumer Sentiment Tumbles to December 2011 Lows
On Friday, the Thomson Reuters/University of Michigan’s initial reading of March consumer sentiment fell to 71.8 from 77.6 in February, well below economists’ expectations for a reading of 78. It is the lowest reading since December 2011. The primary reasons were “dissatisfaction with government economic policies and fewer Americans expected to see improvements in growth or the labor market,” a survey released on Friday showed. CNBC.com
The Labor Department said consumer prices rose 0.7% in February. Excluding volatile food and energy prices, the CPI rose 0.2% last month. Analysts expected a 0.6% increase.
The Big Red Flag
Friday’s consumer sentiment reading is obviously the red flag among this batch of data and it can be blamed for the market’s modest losses. What is curious about that particular data point is that conflicts with recent jobs data and climbing stock prices.
We’re not saying it is a tip about bad things to come, but it could be another sign that the rally needs to pause.
The Bottom Line for Stocks
Lots of pundits have been saying stocks need a break and it feels like they have been saying that for 50 or more S&P 500 points. While we cannot guarantee that such a rest will occur, we can say that micro-cap biotechnology names might offer attractive avenues for dealing with any broader market downturn. Micro-cap staples names could be added to that list.
While the consumer sentiment data is just one data point, it could be a signal to tread carefully with micro-cap discretionary names. However, for what feels like the first time in ages, dabbling with small positions in micro-cap miners and natural gas names is beginning to look like a decent idea.
Research and Editorial Staff
Mike Casson, Executive Editor