MicroCap Market Report – It was a wild week on Wall Street as European fears crept back into the market earlier in the week. After a rough start, stocks rebounded in earnest on Wednesday and Thursday. Friday was a lethargic day, but by the time the closing bell sounded, the S&P 500 had notched a weekly gain of 0.2 percent. The Dow Jones Industrial Average finished with a weekly addition of 0.3 percent.

Not only did Italy’s election results roil markets earlier in the week, but the domestic sequestration issue prompted a large portion of the week’s volatility. The two political parties are now in gridlock over how to replace $1.2 trillion in government spending cuts over the next nine years. In fact, $85 billion of those cuts went into effect on Friday.

While some pundits have argued that the spending reductions could hurt the fragile economic recovery, the fact that stocks did not react more negatively to the lack of a sequestration deal is either a sign that markets and investors view Capitol Hill as having no credibility, that spending cuts are a wise idea, or both.

The result of the goings on in Washington, D.C. had a muted impact on the broader micro-cap universe as the iShares Russell Microcap Index Fund (NYSE: IWC) was off 0.25 percent for the week. The Wilshire Micro-Cap ETF (NYSE: WMCR) rose 0.15 percent.

The Dow came close to posting an historic high…BUT

The Dow gained 89.09 points for the week to close at 14,089.66; recording a five-year high and the third-highest close of all time.

It could be the Washington two-step, better known as the budget blame game, fresh bad news from over the pond or as the LA times stated…”the typical jitters that precede such milestones, the blue chips couldn’t push into new high ground.”

The Dow fell short by 75 points, or about 0.5%, from its historic close on Oct. 9, 2007 of 14,164.53.

S&P 500 needs to kick it into gear

Most market pundits are saying that the broader S&P 500 index would need to bump up to its highest level as well to confirm what the Dow is showing us. That means a move of about 47 points or 3%…last week’s gain of 0.17% helped but not by much.

The NASDAQ gained 0.25% for the week to close at 3169.74, about 1.4% short of the 12 year record of 3213.59 it recorded on Feb. 19.

Our microcap indexes showed mixed results as noted earlier; however, the Russell 2000 Index continued its losing ways… off 0.97% last week, as was the Russell Micro which gave back 0.25% but is still holding onto a YTD gain of 7.19%.

China continues to lead the parade…south

Again…China was the biggest disappointment this past week…with The NASDAQ Golden Dragon China Index losing 1.13%; and flashing RED NUMBERS for YTD gains as well…showing a loss of 0.94% for the year.

Emerging Markets were also off, but by a very small 0.09%. The Internationals were virtually unchanged at 7056.43… off 0.09% for the week.

Oil prices weakened again this week…which many see as a good thing. WTI Crude Oil lost $2.45 to close at $90.68.

Last week the Dollar gained $0.0098…this week the Dollar gained $0.0098…WOW!!! A blistering upward pace indeed to close t 0.7679 euros.

Bonds close above $100

Bonds continued their move to the upside…with the 10-year bond gaining $1.00 to close at $101.31and the 30-year bond gaining $1.66 to close at $101.13. NO…that’s not a misprint.

Gold bugs rejoice…

Gold stopped its fall to the cellar this past week, only losing $0.50 to close at $1,571.90. You know the story by now…”as the dollar strengthens, gold goes the other way.”

Market Report

It was a buy week on the economic data front. In economic news, the National Association of Realtors said its pending home sales index rose 4.5% in January. The index reading of 109.5 is the highest since April 2010.

The Commerce Department said durable goods orders fell 5.2% in January after a 4.3% December increase. Excluding transportation, durable goods orders increased 1.9% in January, good for the sharpest increase since December 2011.

The Commerce Department’s revision to U.S. fourth-quarter GDP showed growth of 0.1% compared with the prior reading that showed a contraction of 0.1%. Economists expected the revision to show growth of 0.5%.

The Labor Department said initial claims for jobless benefits fell by 22,000 to 344,000 last week. Economists expected a decline to 360,000 new claims. The number of people receiving unemployment benefits fell by 91,000 to a seasonally adjusted 3.074 million. The Institute for Supply Management said its Chicago area purchasing managers index rose to 56.8 from 55.6 in January. Economists expected a February reading of 54.

The Commerce Department said consumer spending rose 0.2% in January following a 0.1% increase in December. Economists expected the 0.2% increase. The Thomson Reuters/University of Michigan final index of consumer sentiment for February to 77.6 from 73.8 in January. Economists expected a February reading of 76.3.

The Institute for Supply Management said its purchasing manager’s index for February rose to 54.2 in February from 53.1 in January. Economists expected a February reading of 52.5.

Economic news summary

What those data points, most of which can be deemed “decent” or “solid,” indicate is that investors focused more on the U.S. in the just completed week than China or Europe and that is a good thing. Next Friday brings the February jobs report and that promises to be the marquee scheduled event of the week.

The Bottom Line for Stocks

At the microcap level, the ongoing slide in gold and the stronger U.S. dollar mean these are dangerous times for precious metals miners. Passing on this sector is the best bet for now.

On the other hand, the aforementioned economic data points underscore opportunities with consumer discretionary and energy micro-caps. Relative to large-caps, micro-cap consumer staples are attractively valued here as well.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor

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