In The Rear View Mirror:

It is hard not to sound like a broken record, but the reality is the just completed week looked a lot like the previous one. U.S. equities closed lower for the second straight week as traders were held hostage by central bank commentary.

Translation: Everyone and his sister was hoping and praying for an announcement from Federal Reserve Chairman Ben Bernanke that more quantitative easing is on the way.

Unfortunately, Bernanke did what he normally does. That is, not announce any new monetary easing programs, but he did not rule QE3 out, either. With easing still on the table, stocks rallied on Friday ahead of the long holiday weekend, but Friday’s gains were not enough to stem the tide of a weekly loss.

QE3 in September?

Investors are not forced to point to the next Federal Reserve meeting in mid-September as the possible launch date of more stimulus. But if not then, then when, if ever, will QE3 arrive? That is the million dollar question.

There are a couple of legitimate reasons to keep clinging to the hope that Bernanke may unleash QE3. By the time mid-September rolls around, the August jobs report will have been delivered. In fact, that report comes up next Friday. If it is a stinker, then Bernanke’s hand might be forced.

Couple that with the fact that September is traditionally one of the worst months of the year for stocks and QE3 may be a foregone conclusion sometime in the next three weeks.

Market Report

In economic news, the Commerce Department said U.S. GDP rose 1.7% in the second quarter, topping the initial estimate of growth of 1.5%. U.S. GDP increased 2% in the first quarter. The National Association of Realtors said pending home sales rose 2.4 percent in July. NAR is expecting existing home sales to increase 8%-9% this year.

The Standard & Poor’s/Case-Shiller home price index rose 0.5 percent in June. Detroit, Minneapolis, Chicago and Atlanta recorded the biggest one-month gains, according to the Associated Press. The Conference Board said consumer confidence fell to 60.6 from 65.4 this month. That’s a nine-month low and well below the reading of 66 economists expected.

Certainly, the upward revision to the second-quarter GDP number was a pleasant surprise, but growth of just 1.7% will not be enough to illicit much excitement. With Election Day drawing ever closer, it is reasonable to expect the Romney campaign will keep hitting the Obama Administration on the slack pace of economic output and job growth since the President took office in early 2009. Expect the rhetoric to intensify if the August jobs report disappoints.

Major indices flashing red

The major indexes we follow were off last week…continuing the market’s downward trend. The Russell 2000 and Russell Micro Indices went against the grain and gained 0.36% and 0.47% respectively.

OK…this gold thing finally broke the sea saw and moved to a 5-month high as Bernanke voices “grave concerns” at Jackson Hole

Gold was up for the second week in a row…+$14.80 last week to close at $1,684.60; Fed chief clearly signals QE3 but fails to say exactly when the central bank might launch it.

“Gold surged to a five-month high in heavy trade after Federal Reserve Chairman Ben Bernanke’s key speech fueled speculation of new stimulus in the near future.

“At the economic symposium in Jackson Hole, Wyo., Bernanke said progress reducing unemployment was too slow and the U.S. economy faced “daunting” challenges but stopped short of providing a clear signal of further monetary easing…” Blanchard Investing News Blog, August 31, 2012

“In the last eight sessions, gold has gained 3 percent on expectations that Bernanke’s speech will signal easier monetary policy is on the way. Some analysts said gold might come under pressure if Bernanke does not signal imminent easing.

“This (rally) may mean that the risk for gold is to the downside if the Fed Chairman does not signal clearly – or loudly – enough that further monetary easing is likely on the way,” said James Steel, HSBC’s metal analyst.” Reuters, August 30, 2012

WTI Crude Oil continues to inch a little closer to the $100 price level…up $0.32 to close the week at $96.47. The US Dollar softened ever so slightly again this past week against the Euro (closing at 0.7952 Euros, -0.0040); the 10-year bond closed up this week at $100.688 (+$1.250) and the 30-year bond moved up too… +$2.625 to close at $100.594.

The Bottom Line for Stocks

It has been said for almost as long as financial markets have existed that hope is a dangerous tonic, but that is exactly what many traders are doing these days: Hoping the Federal Reserve delivers QE3. Bernanke knows this and while it is quite apparent that he does not want to travel down Easing Boulevard again, he knows that he cannot risk ruling the option out entirely because that would send panic into the markets.

What Bernanke’s cat-and-mouse game is doing for micro-caps is obvious. Gold and silver have been surging and the miners are finally showing a clear tendency to outperform the metals themselves. How long this trend lasts is anyone’s guess, but precious metals miners are one micro-cap sector to keep on your radar screen.

And as long as QE3 is on the table, betting against high-quality micro-cap energy names is not advisable either. Energy, miners and discretionary micro-caps are the places to look in the current market environment.

Research and Editorial Staff
MicroCap MarkePlace
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