Micro-caps Catch Their Breath… But are Poised for Action

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bottle cap Micro-Cap Market Report: October 28, 2013 – It was another strong week for big-boy equities as the S&P 500 raced to a few more record highs backed by strong earnings reports and decent economic data. By the time the closing bell sounded last Friday, the S&P 500 finished the week with a gain of 0.88% and at another closing high; the micro-caps didn’t fare quite as well.

The Dow Jones Industrial Average, following a spate of solid profit reports, jumped 1.11% on the week while the NASDAQ Composite was something of a laggard with a weekly gain of less than 0.75%.

Investors have been pleased by earnings reports, but they also remained convinced that the Federal Reserve will delay winding back its massive bond-buying program, according to CNN Money.

Micro-caps show mixed results

As we have previously noted, the longer investors believe the Fed’s easy money policy is going to stay in place, the better that type of risk on environment is for micro-caps. The iShares Russell Microcap ETF (NYSE: IWC) gained a quarter of a percent last week while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) actually lost about the same amount.

The Markets @ 10/25/2013
Index Close Weekly % Change YTD Change YTD%
DJIA 15570.28 170.63 1.11% 2466.14 18.82%
NASDAQ 3943.36 29.08 0.74% 923.85 30.60%
S&P 500 1759.77 15.27 0.88% 333.58 23.39%
NYSE Comp 10053.86 69.23 0.69% 1610.35 19.07%
NYSE MKT 2456.63 43.08 1.78% 100.97 4.29%
RUS 2000 111.08 0.39 0.35% 27 32.11%
RUS MICRO 71.17 0.18 0.25% 18.85 36.03%
VANG INTL 52.07 0.08 0.15% 5.77 12.46%
CHINA INDEX 6756.9 -388.08 -5.43% 2318.38 52.23%
EMERG MKTS 6998.91 -88.06 -1.24% -41.06 -0.58%

 

Market Report

After delays caused by the government shutdown, it was back to business as usual on the economic data front and there were some marquee data points out last week.

In economic news, the Labor Department said the U.S. economy added 148,000 new jobs last month, well below estimates calling for 180,000 new jobs. The unemployment rate fell to 7.2% from 7.3%.

Payroll growth in the third quarter averaged 129,000 per month, far less than the 200,000 average in the first half of the year, Reuters reported.

On Thursday, the Labor Department said initial claims for jobless benefits fell by 12,000 to 350,000 last week. Economists expected a reading of 340,000. The less volatile four-week moving average rose 10,750 to 348,250.

On Friday, the Commerce Department said durable goods orders rose 3.7% last month, beating expectations for a 2.3% gain. The August reading was revised up to 0.2% growth from 0.1%. Excluding transportation, orders fell 0.1% against expectations of a 0.5% rise.

Consumer sentiment disappoints

The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment fell to 73.2 in October from 77.5 in September. That is the lowest reading since December 2012. Economists expected an October reading of 75.

In the perverse world of quantitative easing, those mostly mediocre data points were enough to stoke speculation that the next five or six months will be taper free and that is good news for stocks.

China and the Emerging Markets give back some gains

The major indexes we follow were up this past week… but there was some off-shore weakness.

China is still leading the parade…however!

China gave back 5.43% of its YTD gains but is still hanging onto bragging rights at 52.23%. The Emerging Markets Index lost 1.24% for the week and moved back into negative territory at -0.58% YTD.

CONTINUING…

Gold was up again this week… +$36.30 to close at $1,350.70

But… Oil was off $2.96… prices closed Friday at $97.85.

The Bottom Line for Stocks

Heading into November, it is hard not to be bullish. November and December are traditionally strong months for stocks, in particular small-caps and micro-caps. With no imminent end in sight to the Fed’s bond-buying activities, this is a favorable environment in which to own some micro-cap names.

Micro-cap financial services and utilities should be approached with caution, but there are some good opportunities out there… we’ll have more to say about these sectors in the coming weeks.

Consumer discretionary and technology are among the better-looking micro-caps at the moment. Micro-cap oil and gas could have some more room to run, but don’t be too greedy with that one. If you have some nice gains, it is usually a good idea to set up appropriate stop losses.

Research and Editorial Staff
MicroCap MarketPlace
Mike Casson, Executive Editor

 

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