Blog : Time for Well-Earned Skittishness

by Ed Zwirn on May 28th, 2013

Penny stock investors take note: The market for everything from penny stocks to blue chips is exhibiting some perhaps well-earned skittishness, reacting negatively to Ben Bernanke's stating the obvious in his Congressional testimony -- that the Fed could eventually reign in its expansive monetary policy if the economy heats up.

But are things heating up? Economic indicators still point to a long slog before the Fed's 2% medium-term inflation outlook or its 6.5% unemployment rate triggers, affirmed at the last FOMC meeting, become a concern and dry up funding for penny stocks.

But investors, whether or not this was the intention, took the cue from Bernanke last week. The Dow Jones Industrial Average, which was trading over the 15,500 level at one point on Wednesday, lost over 200 points after listening to Uncle Ben that day. After having scored its fourth consecutive positive week, the market fell essentially flat, with the DJIA closing Friday at 15,303.10, off 0.3% from the prior week's 15,354.40.

On the economic front, the news which came in last week was just positive enough to spook a market worried about a Fed tightening:

* On Wednesday, April existing homes sales came in close to the consensus at 4.97 million, up slightly from March's upwardly revised 4.94 million. On Thursday, new home sales for April came in at a higher-than-expected 454,000 and March's figure was upwardly revised to 444,000, from 417,000.

* On Friday, the market, which expected to see orders for durable goods rise 1.6% in April, following a March 6.9% drop, saw this indicator actually go up 3.3 and was informed that the March drop, sharp as it was, came to only 5.9%.

Economic releases worthy of a penny stock picker's attention this week include:

--Tuesday morning's Case-Schiller 20-city index is expected to show a 10.1% price rise for March, up from February's 9.3%, while Wednesday's pending home sales report is expected to show a 1.5% increase for April, even with the prior month.

--Friday is expected to reveal a lackluster consumer situation, with personal income going up 0.1% in April, following a 0.2% increase, and personal spending also going up 0.1% after rising 0.2% in March.

Looking farther ahead, penny stock investors  weighing stocks to buy and sell should be ready for the next FOMC update on June 12. In addition, key updates on employment and inflation should be of key interest to Fed watchers and possibly impact your penny stock portfolio:

--On June 7, the market is expecting to hear that 170,000 jobs were added in May, a respectable but still anemic rate. The unemployment rate is expected to hold steady at 7.5%.

--The June 14 producer price index report and the June 18 consumer price index will be the next indication of whether inflation shows any sign of reappearing. The last time around, the PPI for April actually fell 0.7% and the CPI dropped 0.4%.

Individual penny stock company fundamentals aside, the course of your penny stock, or for that matter your other investments, may be in part determined by any surprises coming from these reports.