In The Rear View Mirror:

So much for the summertime blues. The S&P 500 advanced for the sixth consecutive week, the best run for the broader market index since January 2011. Speaking of something that happened four years ago, the S&P 500 is now flirting with four-year highs. Earlier this week, the Dow Jones Industrial Average spent a small amount of time trading at its highest levels since 2007.

In other words, it is fair to say that the summer doldrums really never set in this summer and that investors’ expectations for the June-August time frame have easily been surpassed.

Market Volume down…temp up

Not surprisingly, volume has been less-than-inspiring. This is the summer after all and volume historically dips when the temperature rises.

About 5.8 billion shares a day changed hands in August, 14% lower than the daily mean in the first seven months of 2012, according to data compiled by Bloomberg. Curiously, the Chicago Board of Options Exchange volatility index, or the VIX, the so-called fear index, is trading at levels reminiscent of the go-go days of 2007.

Bears are not confident

That implies investors are not willing to make significant bearish bets at the moment because the market is not showing material signs of a major reversal.

Russell Microcap Index is weekly leader

The Russell Microcap Index gained 7.58 points or 2.48% to lead all of our followed indices for the week ended 8/17. Plus it’s showing a very impressive 13.80% gain YTD.

For our readers that have not researched the components of the Russell Microcap® Index here’s a detailed description from the Russell Investments website.
The index measures the performance of the microcap segment of the U.S. equity market. Microcap stocks make up less than 3% of the U.S. equity market (by market cap) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next smallest eligible securities by market cap.

As of July 31, 2012, there were a total of 1,510 securities in the index; High market cap: $565 million; Low market cap: $30 million; Wtd. average: $272 million; Median: $152 million.
The Russell Microcap Index is constructed to provide a comprehensive and unbiased barometer for the microcap segment trading on national exchanges, while excluding lesser-regulated OTC bulletin board securities and pink-sheet stocks due to their failure to meet national exchange listing requirements.

The index is completely reconstituted annually to ensure larger stocks do not distort performance and characteristics of the true microcap opportunity set. Indexes are unmanaged and cannot be invested in directly. Source: Russell Investments

Market Report

It was another mixed bag of economic news, but Friday’s headlines were decent enough to give traders reason for optimism heading into next week. In economic news, the Thomson Reuters/University of Michigan consumer sentiment survey for August rose to 73.6 from 72.3. Economists expected the initial August reading to come in at 72.4.

The Conference Board said its index of leading indicators rose 0.4% in July. Economists expected an increase of 0.3%. The index fell 0.3% in June.

On Thursday, the Commerce Department said housing starts fell 1.1% in July from 754,000 starts in June. The June number was upwardly revised. Permits to start new construction rose 6.8% in July.

Initial jobless claims rose by 2,000 to 366,000 claims last week. Claims have declined modestly this month compared to July. The Federal Reserve Bank of Philadelphia said its manufacturing rose to a negative 7.1 in August from a negative 12.9 in July. Economists expected a reading of negative five.

Major indices showing a lot of resilience

The Nasdaq led the way for all major indexes…up 55.73 points or 1.84%. The Dow and as noted earlier the S&P 500 have advanced for six weeks in a row, while the Nasdaq has gained ground the past five weeks.

Regarding gold…up down, up down…if it’s up one week…it’s down the next. Of course gold moved down this past week…the sea saw was due to move in the opposite direction which keeps our record intact…

Gold was down $3.40 last week to close at $1,616.30; again…staying within the 30-day trading range of 1555 to 1625. The gold bugs are probably going to sleep.

WTI Crude Oil moved closer to the $100 price level…up $3.14 to close the week at $96.01.

The US Dollar softened this week against the Euro (closing at 0.8108 Euros, -0.0028); the 10-year bond closed down again this week at $98.313 (- $1.375) and the 30-year bond gave back another $3.609 to close at $96.375.

Micro and small-caps are looking good

What is encouraging about the current state of affairs in the equity market is that since the start of August, the iShares Russell 2000 Index Fund (NYSE: IWM) has outperformed the S&P 500 and the iShares Russell Microcap Index Fund (NYSE: IWC) is not far behind.

Flows to small and micro-caps indicate investors are at least nibbling at risk and that is supportive of further upside from current levels.

The Bottom Line for Stocks

In terms of micro-cap sectors that look inviting right now, there is no getting around the fact that tech is helping lead the broad market rally and there is evidence of that with micro-caps. Even with the rally, there are still compelling valuations to be had with select micro-cap tech names and that could stoke more buying as well as some mergers and acquisitions activity.

The miners are still volatile, but that does not mean the group should be ignored. However, the top opportunities in the natural resources space at the moment can be found with oil and gas firms and to a lesser extent, industrial metals producers.

Research and Editorial Staff
MicroCap MarkePlace
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