Blog : Investors Fire Up Their Grills

by Ed Zwirn on May 24th, 2013

You can almost smell the burgers barbecuing today, as traders of everything from penny stocks to blue chips prepare for the long Memorial Day weekend.

The stock market at this point seems headed for its first weekly decline since mid-April, spooked by worries that the U.S. Federal Reserve may scale back its stimulus policy and daunted by Thursday's 7.3% plunge of Japan's Nikkei index, this index's biggest one-day drop since the 2011 earthquake and tsunami that shook that country's economy.

But it is probably too soon for penny stock investors to write an epitaph for the bull market of 2013. The Nikkei, which is about 70% higher than it was a year ago, clawed part way back on Friday, and in the U.S., the Dow Jones Industrial Average, while down, has so far shown no signs of any sharp reversal.

In the meantime, despite the parsing of the Federal Reserve minutes released on Wednesday, any lessening of the central bank's policy of stimulating the U.S. economy remains far off. The Fed is unlikely to pull the rug out from under the market, given that inflation remains lower and unemployment higher than the levels the Fed said it would use as tripwires to trigger a tightening.

And the Fed is also constrained from lowering the boom by the need for U.S. goods to remain competitive, particularly after its Japanese counterpart recently decided to match dollar-for-dollar the U.S. program of buying $85 billion a month of Treasury and mortgage-backed bonds, an historic move considering that Japan's economy is about one-third the size of ours. Any tightening by the Fed at this point would undoubtedly produce a sharp spike in the value of the Yankee dollar, placing penny stocks and other companies that depend on exports at a competitive disadvantage.

That being said, there is something disconcerting about a stock market rally almost totally dependent upon a central bank stimulus. Investors looking at which stocks to buy and sell would do well to inject a degree of caution into their strategies, and that holds as true for penny stocks as it does for investments in larger companies.

So by all means fire up the grill this weekend. And while you're dousing your ribs in beer, take time to enter the first Peter Leeds penny bank contest.  Entering is easy, and all you have to do to win is guess how many pennies there are in Peter's penny bank. Unlike the penny stock market itself, there is no risk at all involved and like the penny stock market, the potential for rewards is great.