In The Rear View Mirror

 It was a holiday-shortened week reduced to just 3.5 trading days, but that was enough time for U.S. stocks to notch their best weekly performance since June. Stocks capped the week with a Black Friday surge that saw the S&P 500, Dow Jones Industrial Average and Nasdaq all gain at least 1.3 percent. The S&P 500 is still down about a third of a percent for the month of November, but the index is now on a five-day winning streak.

It seems like talks about the fiscal cliff being held by politicians on Capitol Hill and expectations for a robust holiday shopping season were enough to elicit some upside in the just completed week. Still, it must be noted that the fiscal cliff has not been solved just yet and time is running out for such an outcome. Lawmakers have until the end of the year to extend the expiring Bush-era task cuts or risk a brutal year-end performance by equities.

Is there a fourth-quarter rally in our future?

For now at least, it looks like Mr. Market is setting up for a legitimate fourth-quarter rally, but things could be volatile along the way to that outcome. The reason being, politicians as they so often do, could really muck things up for investors, by not solving the fiscal cliff dilemma.

Simply put, that will need to happen to renew risk appetite and lead investors to riskier assets such as micro-caps.

The Markets @ 11/23/2012
Index	Close	Weekly	% Change	YTD Change	YTD%
DJIA	13009.68	421.37	3.35%	792.12	6.48%
NASDAQ	2966.85	113.72	3.99%	361.7	13.88%
S&P 500	1409.15	49.27	3.62%	151.55	12.05%
NYSE Comp	8225.51	293.96	3.71%	748.48	10.01%
NYSE MKT	2386.87	71.53	3.09%	108.53	4.76%
RUS 2000	807.18	30.9	3.98%	66.26	8.94%
RUS MICRO	307.54	12.53	4.25%	31.82	11.54%
VANG INTL	14.46	0.56	4.03%	1.4	10.72%
USX CHINA	4184.86	120.34	2.96%	-344.94	-7.61%
EMERG MKTS	6629.23	137.76	2.12%	623.92	10.39%

You gotta’ love the beginning of this holiday season

What a change from the last two weeks. Every index we track flashed green numbers…the major indices were all up from 3.09% to 3.99%…with Nasdaq leading the way.

The Russell Micro did a complete turn-a-round too… up 4.25%% for the week, and the Russell 2000 was right behind…gaining 3.98%. The internationals showed strength as well with the Vanguard International Index gaining 4.03% and China up 2.96% at the close on Friday.

Gold reversed its trend this week…gaining $37.00…to close at $1,751.30

Following the comments we noted last week from Marc Faber (Swiss ex-pat and long-time Asian resident) and Adrian Ash of Bullion Vault, gold made an impressive recovery and is headed in the direction they believe is the long trend for the yellow stuff.

The Dollar showed a downward trend

The US Dollar softened this week against the Euro (closing at 0.7708 Euros; minus $0.0139); bonds moved below the 100 dollar mark last week…the 10-year bond was off $1.09 to close at $99.39 and the 30-year bond lost $2.20 to close at $98.39.

Oil prices holding steady but with a slight upward bias

WTI Crude Oil gained $1.61 this week to close at $88.28 on Friday. Consumers are still enjoying lower prices at the gas pump…this week I saw $2.99 a gallon in Dallas.

Sobering stats on unemployment

One disturbing perspective noted by Will Deener, financial columnist for the Dallas Morning News, was regarding the persistently high unemployment for younger workers and those with college degrees.

“About 53 percent of those with who hold bachelor degrees are either unemployed or underemployed. The unemployment rate for high school grads age 17 to 20 now stands at 31 percent.”

Market Report

In economic news, the National Association of Realtors said existing home sales rose 2.1% in October to a seasonally adjusted annual rate of 4.79 million from 4.69 million in September. The median home price rose to $178,600 last month, a gain of 11.1% from October 2011.

The Census Bureau said the pace of new home building rose 3.6% in October to an annual rate of 894,000 homes. Applications for new building permits fell 2.7% to an annual pace of 866,000. Next week is data heavy. Tuesday’s S&P/Case-Shiller home price index for September is expected to show the eighth straight month of increases, extending the longest continuous string of gains since prices were boosted by a homebuyer tax credit in 2009 and 2010.

Home sales are reported on Wednesday and the latest consumer confidence number will also be delivered on Tuesday.

For the just completed week, the data were good enough to lift micro-caps, broadly speaking. The iShares Russell Microcap Index Fund (NYSE: IWC) jumped nearly five percent for the week while the Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) added 4.6 percent.

The Bottom Line for Stocks

We’ve already outlined the worst-case scenario; that being the market’s recent bullishness is derailed by the inability of politicians to reach an accord on the fiscal cliff. So let’s lament the best-case scenario. That is that the fiscal cliff is solved AND the holiday shopping season goes well.

In theory, both of those issues should be enough to, in the near-term, outweigh lingering concerns from Europe. With regards to micro-caps, as we noted last week, this is the time of the year where investors must be involved with discretionary names. Conversely, we reiterate the view that utilities, regardless of cap spectrum, are imperiled right now.

Those that are looking to play it safe with micro-caps should consider staples names while those with longer time horizons can use the current environment to position themselves in high-quality energy names.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor

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