U.S. Micro-Cap Sectors Hot – China is Sizzling

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China Micro-Cap Market Report: August 26, 2013 – U.S. stocks posted their first weekly gain in three weeks although market uncertainty is elevated after the release of minutes from the most recent Federal Reserve meeting. Those minutes were released Wednesday and stocks proceeded to close the week in solid fashion with the S&P 500 gaining about 0.5 percent on the week. Micro-cap indexes outpace majors by a wide margin.

The Dow Jones Industrial Average closed slightly lower, but the S&P 500 was up and the Nasdaq Composite climbed 1.5 percent, no small feat given that the Nasdaq market was closed for three hours Thursday due to technical issues. The Dow’s now three-week losing streak is the longest since November.

The key takeaway from the Fed minutes was that most members of the central bank support the notion of tapering if the U.S. economy continues to improve. Where the uncertainty comes from is that there still is not a consensus regarding when tapering should commence.

Micro-cap sectors more than held their own

Markets don’t like uncertainty and that did limit risk appetite a bit, though micro-caps proved sturdy. The iShares Russell Microcap (NYSE: IWC) jumped nearly two percent while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) climbed 2.4 percent for the week.

The Markets @ 8/23/2013
Index Close Weekly % Change YTD Change YTD%
DJIA 15010.51 -70.96 -0.47% 1906.37 14.55%
NASDAQ 3657.79 55.01 1.53% 638.28 21.14%
S&P 500 1663.5 7.67 0.46% 237.31 16.64%
NYSE Comp 9474.82 9.23 0.10% 1031.31 12.21%
NYSE MKT 2329.23 -12.35 -0.53% -26.43 -1.12%
RUS 2000 103.17 1.49 1.47% 19.09 22.70%
RUS MICRO 65.76 1.24 1.92% 13.44 25.69%
VANG INTL 48.21 -0.51 -1.05% 1.91 4.13%
CHINA INDEX 6039.21 213.28 3.66% 1600.69 36.06%
EMERG MKTS 6364.4 -194.91 -2.97% -675.57 -9.60%

Market Report

In economic news, the National Association of Realtors said existing home sales rose 6.5% in July, rising to the highest level in nearly four year. Homes sold at a seasonally-adjusted rate of 5.39 million units. Economists expected 5.15 million units. Year-over-year, the number surged 17%.

On Thursday, initial claims for jobless benefits fell by 15,000 to 320,000 last week. That is the lowest reading since October 2007, according to the U.S. Labor Department. Economists expected a reading of 335,000. The less volatile four-week moving average fell 4,000 to 332,000, the lowest level since November 2007.

The Conference Board’s index of leading economic indicators rose 0.6% last month after being flat in June. Eight of the ten indicators that comprise the index improved last month, including employment, improved equity markets, loan growth and building permits.

Housing softens

And on Friday, the Commerce Department said new home sales dropped 13.4% last month to an annual rate of 394,000 units. That is the lowest reading in nine months. In July, the median price for a new home sale rose to $257,200, up from $237,400 in the same month of 2012, according to Reuters.

These data points constitute a "mixed bag" to go along with the mixed outlook on the tapering start date from the Fed. Good economic news is still bad for stocks because it gives the Fed wiggle room to start tapering sooner than later. The opposite is true of disappointing economic news. While this paradox limits risk appetite, micro-caps still offer some promise in select market segments.

Most major indexes were up…Dow hits three week skid… China hits a home run!

It seems to be the same story…weak economic data, higher interest rates, wide-spread talk of Fed Tapering and choppy earnings reports. Now Microsoft is in the news… and not in a good way.

The NASDAQ Golden Dragon China Index is going crazy and continues to reward those investors that have stuck with the China-based stocks trading here in the US. YTD gains of 36.06% have buried the other indexes we follow.

Gold was up… +$24.00 to close at $1,395.70
Oil was off… prices closed Friday at $106.42 (- $1.04 for the week). Demand softened with the end of the summer driving season.
The US Dollar was off…slightly: – $0.0030 for the week to close at 0.7473 euros.
Bonds made a small move back toward the $100 level: The 10-year bond gained $0.10 to close at $97.27 and the 30-year bond gained $0.94 to close at $96.88.

The Bottom Line for Stocks

Tapering talk has boosted interest rates, which is not good news for several micro-caps sectors, including telecom and utilities. Fortunately, those are two of the smaller micro-cap groups by population.

On a historical basis, the sectors that perform the best as interest rates rise are industrials and consumer discretionary. Emerging markets have been battered and bruised, but selective micro-cap investors can find some opportunities, particularly in Emerging Europe.

Speaking of Europe, micro-caps with exposure to developed Europe are appealing, too, because the Eurozone economy is finally recovering. We’ll have more on this is future issues.

Research and Editorial Staff
MicroCap MarketPlace
Mike Casson, Executive Editor

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