MicroCap Market Report: Markets not looking too strong, even as U.S. stocks rose for a sixth consecutive week as news flow on the earnings front continues to bode well for the bulls. The S&P 500 advanced 0.3% for the week to a new five-year high while the Dow Jones Industrial Average slipped 0.1%. Technology issues impressed, helping send the Nasdaq higher by 0.46% for the week, though those gains were accrued during Friday’s session when the Nasdaq rose 0.91%.

Earnings driving the rally

As we just noted, earnings are at the forefront of this rally and that is a good thing. Fourth-quarter earnings for S&P 500 companies now are estimated up 5.2% versus a year ago, according to Thomson Reuters data. About 75% of the 341 S&P 500 companies which reported fourth-quarter results have beaten estimates, Bloomberg data show.

Winners outpace losers by wide margin

On Friday, New York Stock Exchange winners outpaced losers by a 2-to-1 margin while the margin was 5-to-3 in favor of the winners on the Nasdaq. The ebullience continues to benefit micro-caps as well. The Guggenheim Wilshire Micro-Cap ETF (NYSE: WMCR) posted a small gain on the week while the iShares Russell Microcap Index Fund (NYSE: IWC) endured a half-point loss. Both ETFs are sharply higher over the past month.

Market Report

It was definitely “Mixed-results” for the markets last week!

The Dow was down, the NASDAQ was up, the NYSE Comp was down and the S&P 500 was up.

However…all of the majors are still well into the green numbers YTD, with the DJIA leading the way at a plus 6.84%.

Micro Caps still showing strength…the Russell 2000 Index gained 0.34% last week and is up 7.09% YTD; while the Russell Micro gave back 0.50% for the week but is still showing a very nice 6.56% gain for the year.

China had a strong performance on Friday amid good economic stats, with The NASDAQ Golden Dragon China Index gaining 0.85%; this cut the index’s loss to 1.52% for the week and preserved a 2.24% YTD gain.

Red Numbers for the Internationals and Emerging Markets Indices… both turned in negative results for the week…off 1.10% and 1.57% respectively.

Oil reversed its move toward $100 a barrel…WTI Crude Oil closed at $95.72, off $2.05 for the week…however, with China reporting better-than-expected monthly trade data, we might expect prices to head back in the other direction.

The Dollar strengthens

The president of the European Central Bank, late this week, cited the rising value of the euro as a possible threat to the region’s economic recovery, comments that immediately sent the euro down sharply against the dollar. The US Dollar gained $0.0150 for the week, to close at 0.7482 euros.

Bonds reversed direction with the 10-year bond gaining $0.56 to close at $97.09 and the 30-year bond gaining $0.90 to close at $91.98. Risk aversion investors shifted emphasis to safe-haven currencies.

Gold is definitely doing that sea saw thing again, but why??? Off $3.40 this past week, gold reversed its direction and closed at $1,666. Here’s an interesting primer I found on the Kitco website about the US Dollar strength/weakness vs the price of gold:

“When the US Dollar gets stronger, it takes fewer dollars to buy any commodity that is priced in $USD. When the US Dollar gets weaker it takes more dollars to purchase the same commodity.

“The price of all US Dollar denominated commodities, like gold, will change to reflect the fact that it will take fewer or more dollars to buy that commodity. So it’s quite possible, in fact it’s almost always the case that a portion of the change in the price of gold is really just a reflection of a change in the value of the US Dollar. Sometimes that portion is insignificant. But often the opposite is true where the entire change in the gold price is simply a mathematical recalculation of an ever-changing US Dollar value.

“When the dollar gets strong, gold appears to go down, and vice versa. That accounts for part of the fluctuations that we see in the value of gold.

“The other part is an actual increase in the supply or demand for gold. If the price is higher when being measured not only in US Dollars, but also in Euros, Pounds Sterling, Japanese Yen, and every other major currency, then we know the gold demand is higher and it has actually increased in value.

“Consequently, if gold is higher in US Dollars while at the same time cheaper in every other currency, then we can conclude that the US Dollar has weakened, and that gold has actually lost value in all other currencies. But the price, because it is being quoted in $USD will be higher and give the illusion of gold becoming more valuable. In such a case the devaluation of gold, due to increased supply on the market, is camouflaged by a weakened US Dollar.

“Our feature on kitco.com breaks the change of the price of gold into 2 components. One part shows you how much of that change can be attributed to US Dollar strength, or lack of it. The other portion is indicative of how much the price changed as a result of normal trading. Interestingly whatever changes happen to the price of gold as a result of US Dollar strength/weakness also occurs to every other US Dollar denominated commodity by the exact same proportion.”

For more information go here: http://www.kitco.com/kitco-gold-index.html

In economic news, the Institute for Supply Management said its January survey of purchasing managers fell to 55.2% from 55.7% in December. Analysts expected a January reading of 55%. The new-orders index fell 3.9 points to 54.4% and production dropped 4.4 points to 56.4%.

First-time claims for jobless benefits fell by 5,000 to a seasonally adjusted 366,000 last week, according to the Labor Department. The less volatile four-week moving average fell by 2,250 to 350,500, good for the lowest reading since March 2008.

China flexing its muscles

On Friday before U.S. markets opened, China said exports soared more than expected in January. The world’s second-largest economy added that imports climbed 28.8 percent, highlighting the country’s impressive economic turnaround.

Recent data out of the U.S., China and to a lesser extent, some other developed markets, underscores the notion that the global economy is recovering and that investors should be embracing riskier assets in the near-term.

The Bottom Line for Stocks

Given the current market environment, this is an excellent time to be involved with micro-caps. Positive market tenor usually gives way to increased liquidity for micro-caps, adding to the asset class’s viability.

Our energy call continues to look good and we would advise allowing winners to run in that space. With China delivering a steady stream of positive economic news, the next several months could prove to be a good time to revisit select Chinese micro-caps.

Precious metal miners are at an inflection, adding to risk in the group, though we would recommend dancing more with those involved in the platinum metals group over gold and silver. Until further notice, financials should continue to work and we are growing more constructive on micro-cap medical device names.

Research and Editorial Staff
MicroCap MarkePlace
Mike Casson, Executive Editor

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