MicroCap Market Report: June 7, 2013 – On the back of the best two-day run for the S&P 500 since January, U.S. stocks, including most micro-caps closed the week in fine fashion. Over the last two days of the week, the S&P 500 surged 2.1% to post a weekly gain of 0.8%. The Dow Jones Industrial Average gained 1.4% on Friday and the daily percentage gains for the S&P 500 and NASDAQ in the final day of the week were the best in six weeks.
May jobs report spurs markets
A better-than-expected May jobs report was the catalyst. Employers added 175,000 new jobs last month, but the unemployment rate rose to 7.6% from 7.5%. The April reading was revised lower to 149,000 from 165,000 while the March reading was revised down to 138,000 from 142,000.
The May number was good enough and that combined with the downward revisions to the March and April readings was enough to hearten investors that the Federal Reserve will probably not be ending quantitative easing anytime soon.
Risk appetite seen for micro-caps
All that was enough to spark some increased risk appetite, which helped bolster micro-caps. The iShares Russell Microcap Index (NYSE: IWC) gained almost one percent on the week while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) closed flat.
The broader small cap indicator, the iShares Russell 2000 Index (NYSE: IWM) gained 0.41% for the week and is up 16.79% YTD.
|The Markets @ 6/7/2013|
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Even before Friday’s jobs report, it was a brisk week on the economic data front. On Monday, the Institute for Supply Management’s index for May fell to 49 from 50.7 in April. Economists expected a May reading of 51. Readings below 50 indicate contraction.
The Commerce Department said April construction spending rose 0.4% to an annual rate of $861 billion, below the 0.8% increase economists expected. Private residential construction spending fell 0.1%.
On Wednesday, the Institute for Supply Management said its May services index rose to 53.7% from 53.1% in April. Economists expected a May reading of 54%. Readings above 50% indicate expansion.
As is par for the course, all of those numbers kind of fall by the wayside when the monthly jobs report rolls around, but investors should dig a little deeper. Stocks traded noticeably lower through the first three days of the week, a sign that investors were not keen on the aforementioned data points.
Is the end of QE in sight?
The major issues facing stocks and other risky assets right now and for the foreseeable future are the potential end of quantitative easing, the strengthening U.S. dollar and rising interest rates. The good news is micro-caps offer very low correlations to those scenarios.
Major indexes were green – Internationals and Emerging Markets took a hit!
Last week’s gains padded the YTD numbers for the indexes we cover…the DJIA at 16.36% is the leader in the club-house for the majors. The Guggenheim Wilshire Micro-Cap Index is sporting a 20.29% YTD gain, followed closely behind by the Russell 2000 at 18.25%.
The Emerging Markets dropped 2.25% for the week and is in solid red territory at -4.75% YTD.
Oil prices moved higher this week and closed Friday at $95.93…and gold moved in the opposite direction.
Gold closed the week at $1,384.00, down $8.60; which has to have the gold bugs asking…”what the hay is going on?” Here’s an interesting article that sheds some light on the subject: http://www.bloomberg.com/news/2013-06-06/gold-traders-most-bullish-since-bear-market-began-commodities.html
The Bottom Line for Stocks
The current environment is not built for low-beta sectors at the micro-cap level, so we reiterate the view that micro-cap consumer staples and utilities should be passed on. Speaking of reiterations, financials of all cap sizes are worth embracing. With recent weakness in large-cap biotech, we’re recommending a short-term to our previously bullish views on micro-cap health care names.
Other sectors that are setting up nicely among micro-caps include energy and consumer discretionary and, for the adventurous among us, there are some compelling valuations among international stocks, but we would approach those micro-caps with “kid gloves.”
As mentioned in a previous issue, take a close look at a unique technology stock that holds great promise: Brekford Corp. (OTCBB: BFDI. Click on the following link to read our full coverage: http://microcapmarketplace.com/2013/06/03/profit-from-the-long-arm-of-the-law-with-brekford/
RJ Falkner & Company Research Coverage
“In our opinion, BFDI shares have the potential to increase approximately 120% in price over the next 9-12 months, and several hundred percent during the next 2-4 years.”
R. Jerry Falkner, CFA in a recently released research profile. 3/11/2013
Click here to read the full report: http://www.rjfalkner.com/page.cfm?pageid=17712
Research and Editorial Staff
Mike Casson, Executive Editor