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Penny Stock Week: Matzohs, Easter Eggs and Corrections
by Ed Zwirn
The stock market begins a trading week shortened by both the Passover and Easter holidays following a bloodbath which saw all major market indexes beat a sharp retreat.
One week ago Friday, the Dow Jones Industrial Average had been at a record high. Dud IPOs including La Quinta (LQ) and Ally (ALLY) both priced at the very bottom of their original ranges, feeding into a sense of malaise that had already driven tech stocks down by about 10%. The result was a week which ended in a two-day debacle which saw the NASDAQ composite lose 4.4%, the Dow Jones Industrial Average decline 2.5% and penny stocks, as represented by the small-cap Russell 2000 index, off 4.2%.
Looking at the week as a whole, the Dow closed Friday at 16,026.75, down 2.4% from the previous week's 16,412.71. The broader market performed even worse, with the NASDAQ falling 3.1% to close below 4,000 for the first time since December while penny stock investments took an even sharper beating, with Russell 2000 off 3.6%.
Friday's producer price index update had been expected to show a modest 0.1% rise for March. Instead, the data wound up showing a sharper 0.5% spike, indicating a return of pricing power for companies, following February's 0.1% fall. The "core" PPI, which excludes the more volatile food and energy inputs and is better in determining monetary inflation, showed an even higher increase of 0.6%, following February's 0.2% decline.
Looking ahead, this week will see a shortened trading window, first due to the advent of Passover celebrations on Monday night and later due to the Good Friday holiday at the end of the week. Earnings announcements will play a large part in determining the market's direction, with 54 Standard & Poor's 500 companies set to report first quarter earnings this week, including headliners like GE, Johnson & Johnson, Google and IBM.
There is reason to believe that many traders last week contributed to Thursday and Friday's debacle by dumping shares ahead of these announcements, which are expected to be reflective of this past winter's economic downturn. If this was indeed the case, these earnings announcements are unlikely to cause major market downturns, and there could possibly (but not probably) be some upside surprises.
At the same time, investors confront an unstable international situation, with the situation along the Ukraine-Russia border showing every indication of deteriorating into a deadly shooting war which could potentially involve the NATO alliance and, at the very least, threaten European industry (and the European recovery) through the interruption of Russian natural gas supplies.
On the domestic side of the equation, investors face a heavy calendar of economic releases expected to confirm evidence of a springtime recovery from the doldrums endured by U.S. businesses during a relatively harsh winter. This morning's retail sales report showed a 1.1% increase for March, following an upwardly revised increase of 0.7% for February.
Looking ahead this week, although upcoming economic releases may not command center stage, given the sorry state of the world and the earnings outlook, they should be watched by investors for evidence at to whether the U.S. economy has actually begun gaining steam with the advent of spring:
-- Tuesday's consumer price index may possibly prove interesting, given the unexpected upsurge of producer prices reported last week. The CPI is expected to show a 0.1% rise for March, continuing February's increase. The core figure is also expected to rise 0.1%, the same rate of increase seen the prior month. While any upside deviation from this consensus may spook the market with fears of the impact rising inflation may have on U.S. Federal Reserve policy, a resurgence of inflation could also be viewed with a glass-half-full outlook, showing as it would an increase in demand.
-- Wednesday is expected to produce news of a spike in housing starts for March, from February's 907,000 to 955,000. Building permits, on the other hand, are expected to fall slightly, going from February's 1.018 million to a March showing of 1.003 million.
-- Also on Wednesday, look for March's industrial production update increase to come in at 0.5%, following February's 0.5% rise.
The upshot may very well be a stock market which keeps investors in everything from penny stocks to blue chip shares glued to the screen this week. As of this past Friday, the consensus seems to have been that we are already in the midst of a market correction, with a recovery coming later in the year.
If this prognosis proves accurate, there could be buying opportunities for otherwise sound stocks that have taken a beating solely due to market conditions. It remains to be seen whether this proves to be the case, but it doesn't hurt to do your homework in the meantime and position yourself to score big on an H2 U.S. economic recovery, assuming that this is how things play out.
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