Micro-cap Indexes Take Smaller Hit Following Big Ben’s Comments

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$ signsMicro-Cap Market Report: June 21, 2013 – As we predicted in our previous recap, the Federal Reserve loomed large in the just completed week. That is the easy way of saying that despite some modest upside in Friday’s session, the major and micro-cap indexes finished up a sorry week; just about the worst for both since April.

All three of the major U.S. indexes closed lower by at least 2.5% on the week after the S&P 500 sank 2.5% on Thursday. That was the worst one-day performance for U.S. stocks since 2011.

The S&P 500 is now 4.6% below its May peak, but noteworthy is the fact that the index has gone 149 days without a retreat exceeding 5% or more, according to Bloomberg. That is an impressive run and one that was put to the test last week thanks to Ben Bernanke and friends.

The Fed implied it could begin winding down quantitative easing later this year and perhaps stop the bond-buying program altogether next year.

Big Ben’s chatter affects micro-cap indexes too, but not as much

Fed tapering chatter obviously spooked markets and prompted diminished risk appetite. That was not good news either for micro-caps as the iShares Russell Microcap Index Fund (NYSE: IWC) fell 1.28% on the week. The Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) lost a smaller number at -1.20%.

The Markets @ 6/21/2013
Index Close Weekly % Change YTD Change YTD%
DJIA 14799.4 -270.78 -1.80% 1695.26 12.94%
NASDAQ 3357.25 -66.31 -1.94% 337.74 11.19%
S&P 500 1592.43 -34.3 -2.11% 166.24 11.66%
NYSE Comp 9018.55 -245.14 -2.65% 575.04 6.81%
NYSE MKT  2238.95 -98.27 -4.20% -116.71 -4.95%
RUS 2000 95.98 -1.73 -1.77% 11.9 14.15%
RUS MICRO 60.85 -0.79 -1.28% 8.53 16.30%
VANG INTL 45.62 -1.9 -4.00% -0.68 -1.47%
CHINA INDEX 4720.8 -163.02 -3.34% 282.28 6.36%
EMERG MKTS 6158.43 -369.23 -5.66% -881.54 -12.52%


Market Report

In economic news, the Labor Department said the U.S. consumer price index rose 0.1% last month after falling 0.4% in April. Economists expected a 0.2% increase. Excluding food and energy prices, the index was up 0.2% as expected.

Housing starts strong

The Commerce Department said housing starts rose 6.8% in May to a 914,000 annualized rate from a revised 856,000 in April. Applications for single-family homes jumped to 622,000, the highest level in more than five years.

On Thursday, the National Association of Realtors said existing home sales rose 4.2% in May to an annual rate of 5.18 million units, the best level since November 2009. Analysts expected a reading of 5 million units.

Economy expanding

The Labor Department said initial claims for jobless benefits rose 18,000 last week to 354,000. Analysts expected a smaller increase to 340,000. The less-volatile four week average rose just 2,500 to 348,250. The Federal Reserve Bank of Philadelphia’s general economic rose to 12.5 from -5.2 last month. The reading is the best since April 2011. Readings above zero indicate expansion.

Once again, most of the week’s data points can be considered decent to good, but thanks to Big Ben and the Fed, we’re operating in an environment where good economic news is bad news for stocks.

It’s counter-intuitive, but the reason being the stronger the economy gets, the more room the Fed has to end easing.

Major indexes continue with the Red Ink – AMEX, Internationals, China and the Emerging Markets take big hits!

The S&P dropped 2.11% for the week but is still on solid positive ground with an 11.66% YTD gain. The DJIA gave back 1.80% last week… however the YTD gain of 12.94% is impressive

At -4.20%, -4.00%, -3.34% and -5.66%… the AMEX, Internationals, China and Emerging Markets respectively are quickly headed in the wrong direction. China is hanging onto a 6.36% YTD gain, but the other indexes are in negative returns territory.

The Guggenheim Wilshire Micro-Cap is leading our group of indexes with an 18.89% gain since Jan 1, indicating that certain sectors of the smaller-cap world are alive and well.

OK… oil and gold are moving in the same direction, but not the way some investors would like

Oil prices closed Friday at $93.69 (down $4.16)…and Gold busted thru the $1300 level to close at $1,291.60, off $95.70 for the week… so much for the trading range of the 1350s to low 1420s.

Gold, down 17% since mid-April, has lost 23% this year and could be on pace for its biggest annual drop since 1981…reports Money Morning. Last week’s drop was of course fueled by a potential slowing of the Federal Reserve’s bond purchases later this year.

The US Dollar was flat +/–$0.0000, to close at 0.7493 euros.

Bonds reversed themselves this week… the 10-year bond lost $3.32 to close at $93.34 and the 30-year bond lost $4.72 to close at $87.34. Yields go up…prices go down. Treasury 10-year note yields rose past 2.5 percent for the first time in almost two years on June 21, having climbed from a record low of 1.379 percent set on July 25, 2012.

The Bottom Line for Stocks

Contrary to popular belief, this is not a bad time to be involved with micro-caps. It is, however, imperative that investors be hyper-selective at the sector level. Another weekly plunge for gold and other precious metals highlights the notion that micro-caps miners are in for more downside.

We reiterate the view that rising interest rates will be bad news for micro-cap utilities and telecom names, but there is good news. Micro-cap financials and oil and gas look firm here.

Research and Editorial Staff
MicroCap MarketPlace
Mike Casson, Executive Editor

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