Blog : Penny Stock Week: Small Caps Lead as Market Eyes Fed

by Ed Zwirn on August 26th, 2013

In a bullish signal, penny stocks and small-cap shares are leading the stock market to the upside Monday morning, despite a report showing a sharp decline in July durable goods orders, with the Dow Jones Industrial average up 0.09%, the NASDAQ up 0.31% and the penny stock-rich Russell 2000 up 0.94%.

This follows a week which saw the DJIA continuing its recent slide, closing Friday at 15,010.51, down 0.5% from the prior week's 15,081.47.

Broader market indices outperformed the 30 DJIA blue chip stocks, with the NASDAQ up 1.5% and the penny stock-rich Russell 2000 up nearly 1.4%.

Last week's news releases were noteworthy both for sowing additional confusion about the real estate sector and exposing the market's heightened sensitivity to Federal Reserve intentions (with the release of the July 31 FOMC minutes).

--On Wednesday, the July existing home sales figure came in at 5.39 million, an increase of more than 6% on the month and 17% versus a year ago, handily beating the consensus forecast, which had called for a 5.1 million figure.

--But on Friday, the July report of new home sales -- which had been expected to show a fall to 485,000, from June's 497,000 -- proved to be a big disappointment at 394,000. In addition, the June estimate was downwardly revised to 455,000.

Look for further real estate confusion to emerge Tuesday, with the release of the Case-Schiller 20-city index. The market is expected to show a 12% rise for June, down from 12.2%.

This morning's disastrous durable orders report had already been expected to look bleak, with the consensus expecting a 5% drop. But the news that orders for big ticket items actually dropped 7.3%, its largest fall since August 2012's 12.9% plummet, came as a surprise.

The great majority of this decline was said to come from weaker aircraft orders. Excluding transportation, the July fall came to 0.6%, better than the headline figure but still worse than market expectations.

Also worth watching this week:

--Thursday's latest estimate of Q2 GDP is expected to show a 2.1% rise, following Q1's 1.7% showing.

--On Friday, the numbers are expected to show a 0.1% rise in personal spending for July, a slowdown from June's 0.3% rate of increase. Personal spending is expected to show a 0.3% rise, down from June's 0.5%.

But the release last week of the July 31 Fed minutes should prove to be a curtain opener for one of the most anticipated FOMC meetings of recent history, and most economic and earnings news ought to take a backseat until Sept. 18. On that date, amid increasing speculation over when the Fed will begin to curtail its $85 billion monthly bond buying spree, the Fed will present a full-fledged policy announcement, with a barrage of fresh economic statistics and a Ben Bernanke press conference, making it an ideal occasion to announce policy changes.