In The Rear View Mirror:

Third-quarter earnings season is officially underway and, apparently, investors do not like the bitter pills they were to digest this past week. That much is clear because U.S. equities just wrapped up their worst weekly performance since June. The three major indexes were mixed Friday, but the S&P 500, Dow Jones Industrial Average and Nasdaq all lost at least two percent on the week.

Even with that glum run, the S&P 500 is still up by nearly 12% over the past four-and-a-half months, but earnings season could trim that number down a bit. Fortunately, the earnings reports from banking bellwethers J.P. Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) were strong on Friday.

A wait-and-see approach is valid considering how much financials have run up this year, but strong results from high-quality large-cap banks such as the aforementioned pair could portend strength ahead for the upper crust of the micro-cap banking sector.

On the other hand, less-than-impressive quarters from Alcoa (NYSE: AA) and Advanced Micro Devices (NYSE: AMD) could be signs that investors will be best served by steering clear of the materials and semiconductor sectors in the near-term.

The Markets @ 10/12/2012
Index	Close	Weekly	% Change	YTD Change	YTD%
DJIA	13328.85	-281.3	-2.07%	1111.29	9.10%
NASDAQ	3044.11	-92.08	-2.94%	438.96	16.85%
S&P 500	1428.59	-32.34	-2.21%	170.99	13.60%
NYSE Comp	8227.08	-156.99	-1.87%	750.05	10.03%
NYSE MKT	2425.97	-59.39	-2.39%	147.63	6.48%
RUS 2000	823.09	-19.77	-2.35%	82.17	11.09%
RUS MICRO	320.64	-8.36	-2.54%	44.92	16.29%
VANG INTL	14.21	-0.24	-1.66%	1.15	8.81%
USX CHINA	4312.45	-59.5	-1.36%	-217.35	-4.80%
EMERG MKTS	6667.84	-28.37	-0.42%	662.53	11.03%

Market Report

In economic news, the Labor Department said the Producer Price Index jumped 1.1% in September due to increased energy prices. Economists expected an increase of 0.7%. The Thomson Reuters/University of Michigan initial gauge of October consumer sentiment rose to 83.1 from 78.3 in September. The reading is the highest since September 2007. Economists expected an October reading of 78.

On Thursday, initial claims for jobless benefits fell by 30,000 last week to a four-and-a-half year low of 339,000 claims. The less volatile four-week moving average fell 11,500 to 364,000. Economists expected last week’s number to come in at 370,000 claims. Economists are expecting first-quarter 2013 GDP growth of 1.6% down from a previous estimate of 1.7%. They also pared their second-quarter forecast to growth of 2.1% down from 2.3%.

It was a rough week for micro-cap ETFs as the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) and the iShares Russell Microcap Index Fund (NYSE: IWC) each lost about 2.5%. IWC is in the red over the past month, but WMCR is higher over the same period.

Last week was just plain UGLY…It’s all RED

This schizophrenic market did a complete turn-a-round and was flashing red numbers for every index we follow.

Every major market metric lost 2% or more…with NASDAQ giving up close to 3%. The micros also gave back quite a bit of ground with the Russell Micro Index losing 2.54%.

Randy Warren, chief investment officer for Warren Financial Service, offered this perspective…”What people have to decide is, is America going into a recession with the rest of the world, or are we going to start accelerating and lead the way out of recession for the rest of the world.” Daily Finance

Gold is screwing with us too…down $20.60 last week…closing at $1,758.00

Up four weeks in a row; down one week; back up two, down one. If you’re a gold bug, you have got to be frustrated.

The US Dollar edged back up against the Euro (closing at 0.772 Euros, +$0.0049); bonds reclaimed a little ground…the 10-year bond was up $0.781 to close at $99.719 and the 30-year bond gained $2.734 to close at $98.359.

WTI Crude Oil inched up $1.98 closing at $91.86 on Friday.

The Bottom Line for Stocks

As we noted last week, the next few weeks of market action will be determined by earnings results and guidance and the market’s perceived outcome of the presidential election. In the essence of not allowing this forum to become political commentary, the non-partisan view of things is that the polls show a tight race.

Due to that, it would not be unreasonable to envision further declines ahead of the election with a rally immediately to follow.

Regarding micro-caps, prudence is advised given the recent risk-off tenor to hit the market. At the sector level, financials still hold some allure as do biotechs, but better pricing in energy and materials fare will likely avail itself for the patient investor.

Research and Editorial Staff
MicroCap MarkePlace
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