MicroCap Market Report – U.S. stocks rebounded on Friday from a glum two-day performance to end the week on a strong note as the S&P 500 and Dow Jones Industrial Average each rose at least 0.86 percent while the NASDAQ jumped by nearly one percent. That all sounds good, but it was not enough to keep three of the major indices from notching weekly declines.

This is how bad things were for the S&P 500 on Wednesday and Thursday: The benchmark U.S. index rose 0.9 percent on Friday and still managed to close down on the week. That is because the combined losses on Wednesday and Thursday amounted to 1.9 percent which was enough to send the S&P 500 to its first weekly loss of the year.

What do the declines actually signal?

The problem with the market action this week is not the declines. No rally goes on untested and nothing moves up in a straight line. Those issues are just part of life in the financial markets. Rather, what is concerning is that there are signs a pullback is imminent.

Those signs include commodities being decked, which means the dollar is rising. The U.S. Dollar Index is on a multi-week winning streak. Another sign is sector leadership. Consumer staples, health care and utilities are looking strong. High-beta fare, not so much. And emerging markets, broadly speaking, continue to provide challenges. None of these can be considered positive signs.

Market Report

The DJIA eked out a modest 0.13% gain for the week, but the other Majors were down

The Dow gained 18.81 points for the week to close at 14,000.57; the S&P 500 lost 0.28% and ended a seven week winning streak; the NASDAQ recorded a 0.95% loss and the NYSE Composite gave back 0.43% to close at 8894.63.

The DJIA and S&P 500 are showing more than decent YTD gains at 6.84% and 6.27% respectively, but still behind the smaller cap stocks, although these guys did not have a good week either.

The Russell 2000 Index lost 1.79% last week but is up 7.37% YTD; the Russell Micro gave back 0.55% for the week and is showing a very nice YTD gain of 7.45%.

China led the parade…only in the wrong direction

China was the biggest disappointment this past week…with The NASDAQ Golden Dragon China Index losing 2.18%; Emerging Markets were also off by a big number…minus 2.00%. Red Numbers as you might imagine continued for the Internationals too… off 0.52%

Oil prices backed up this week…WTI Crude Oil lost $2.73 to close at $93.13.

The Dollar strengthened again, if you call +.0098 an upward move

The US Dollar gained $0.0098 for the week, to close at 0.758 euros. As we noted last week, that’s a move hardly worth reporting, so we won’t.

Bonds continued to move to the upside…with the 10-year bond gaining $0.39 to close at $100.31and the 30-year bond gaining $0.56 to close at $99.47. Those risk aversion investors we have talked about on several occasions have continued to shift their attention toward safe-haven currencies.

The gold bugs are probably “catatonic” by now!!!

Gold dropped thru the bottom again this past week, losing $36.40 to close at $1,572.40. As the dollar strengthens, gold goes the other way.

In economic news, the NAHB/Wells Fargo Housing Market Index edged down to a reading of 46 in February from 47 in January. The modest drop by the Housing Market Index came as a surprise to economists, who had expected the index to inch up to 48.

The Labor Department said its producer price index for January rose 0.2% after falling 0.3% in December. For the 12 months ending in January, wholesale prices were up 1.4% after a 1.3% increase in December.

The Commerce Department noted that housing starts fell 8.5% in January after jumping 15.7% in December. New home construction declined to a seasonally adjusted annual rate of 890,000 last month from 973,000 in December.

Home sales were strong

The National Association of Realtors said existing home sales rose 0.4% in January to a seasonally adjusted annual rate of 4.92 million units. Analysts expected a 4.9 million-unit rate. The January 2013 rate is the second-highest since November 2009.

Initial claims for jobless benefits jumped by 20,000 to 362,000 last week, according to the Labor Department. The less volatile four-week moving average rose by 8,000 to 360,750.

Consumer price index flat two months in a row

The Labor Department said its consumer price index was unchanged in January after a flat reading in the prior month. Economists expected a modest January increase of 0.1%. The core index, which excludes food and energy prices, rose 0.3% last month, topping the 0.2% increase economists expected.

Overall, this batch of data points is by no means “rotten.” However, some of the numbers, chief among them the jobless claims report, underscore the fragility of the U.S. economic recovery. With the Federal Reserve hinting quantitative easing may be coming to an end, stocks can ill afford prolonged weakness on the economic data front.

The Bottom Line for Stocks

To say this is an inflection point for stocks would be overly dramatic, but it is reasonable to say investors are more jittery this weekend than they were last. At the micro-cap level, opportunities remain plentiful, but let’s first start with what sectors to be aware of and why.

In the near-term, we’re less constructive on oil names, but see a buying opportunity after a brief shake-out. With a February pull-back, Black Ridge Oil & Gas, Inc. (OTCQB: ANFC) looks to be even more attractive than when we first initiated coverage: http://gator3112.temp.domains/~jmcasson/2013/02/08/bakkens-boom-could-be-a-boon-for-black-ridge/

Gold and silver miners continue to be serious laggards and we would also be hyper-selective among emerging markets names. The non-surprises are staples and health care names.

The real surprise among the micro-cap sectors we do like is financials because so many are trading at attractive valuations right now. If you haven’t already, take a look at Citizens First (NASDAQ: CZFC): http://gator3112.temp.domains/~jmcasson/2013/02/18/citizens-first-a-better-way-to-bet-on-bank-stocks/

We believe there is a lot of upside to this nano-cap community bank stock. Until next week, good luck and good investing.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor
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