In The Rear View Mirror:

As all the fervor over the Federal Reserve’s announcement of the next round of quantitative easing (QE3) burned off, stock market action was lethargic in the just completed week. The S&P 500, Dow Jones Industrial Average and the Nasdaq Composite each meandered to small losses while the NYSE Composite lost close to 1%.

It may sound too simple to be true, but in the absence of any major headlines, the week’s action was defined by profit-taking and investors merely pausing to catch their breath. Stocks slipped slightly on Friday despite some rumors of a Spanish bailout.

Spain is still a pain in the backside

Spain still needs to meet some stringent standards to qualify for a European bailout. Even if the Eurozone’s fourth-largest economy is bailed out, investors know it is dealing with unemployment that is north of 20 percent and other major European economies are mired in deep recessions.

Broadly speaking, it was a decent week for micro-caps as the iShares Russell Microcap Index Fund (NYSE: IWC) touched a new 52-week high. On volume that was roughly double the daily average, the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) closed at a new 52-week high on Friday.

Market Report

In economic news, initial claims for jobless benefits fell by 3,000 last week to 382,000. Economists expected a decline to 375,000. The four-week moving average increased by 2,000 to 377,750. The Philly Fed survey showed improvement to negative 1.9 this month from negative 7.1 in August. Economists expected a September reading of negative four. This is the fifth straight month of negative readings.

The Conference Board’s index of leading economic indicators fell by 0.1% last month following a July increase of 0.5%. Economists forecast an August decrease of 0.1%. Existing home sales jumped 7.8% last month to a 4.82 million annual rate. Economists expected an increase to a 4.56 million clip.

The Commerce Department said August housing starts rose 2.3 percent to adjusted annual rate of 750,000 units. Economists expected a reading of an annual rate of 765,000 units.

Those housing data points were particularly bullish and indicate that we may have seen the bottom in the housing market. Shares of home builder stocks rallied this week, a positive sign for broader market bulls because of that sector’s cyclical and high-beta.

Market Rally Takes a Breather

The excitement of the last several weeks came to an end as the market moved sideways and took in the QE3 news. Most indices we follow turned red…the two exceptions were the NYSE MKT (Amex) which gained 0.75% and the Russell Micro which was up 0.47% for the week ended 9/21.

The big losers were the Internationals (-2.68%) and China stocks (-1.99%).

Gold reversed itself…-$57.75 to close at $1,724.10

After moving up four weeks in a row, gold gave back some of those gains last week. The consensus seems to be that higher prices are in our future and it’s just a matter of time.

The US Dollar strengthened against the Euro (closing at 0.7704 Euros, +.0087); the 10-year bond closed up this week at $98.844 (+$1.031) and the 30-year bond gained back some ground… +2.750 to close at $96.172.

The Bottom Line for Stocks

For those that are still suffering from the summer doldrums, rest assured the market should take on a more exciting tone as we edge closer to third-quarter earnings season. Some big name companies have already reported, but it will be another couple of weeks before the earnings spigot is turned on in full force.

According to Will Deener, financial columnist, “corporate earnings are projected to decline 2.8% in the third quarter. If the growth rate is negative it will break a streak of 11 straight quarters of positive earnings. Earnings are expected to accelerate in the fourth quarter to a 9 .6% growth rate, which bodes well for stocks.”

WTI Crude Oil lost about six bucks this week, to close at $92.89 on Friday. That could set up a buying opportunity at the higher end of the micro-cap energy space, but it’s too early to tell for sure.

Gold and silver miners continue to post stunning gains and are looking like prime examples of stocks that no matter how overbought they appear, they just keep surging. The environment for hard assets is favorable right now and it is still too early to get out of the miners.

So the miners are our first micro-cap sector preference, followed by consumer discretionary. Wait for better entry points in financials and energy names

Research and Editorial Staff
MicroCap MarkePlace
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