Blog : Penny Stock Week: Small Caps Continue to Outperform

by Ed Zwirn on September 23rd, 2013

The stock market has opened this week on the downside, as traders continue to digest gains seen from last week's post-Fed announcement rally and speculate on the possible disruptions that may stem from the latest budget impasse in Washington.

Looking beyond the U.S., the news that German Chancellor Angela Merkel has won a convincing victory over the weekend would at first glance seem to reinforce the perception that the austere policies of her government will continue. But the parliamentary arithmetic of the outcome means that the chancellor may be forced to form a coalition with one or more parties to the left, an outcome that could push her (and Europe) into a more expansionary monetary policy.

This follows a week which saw the market for everything from penny stocks to blue chips attain record levels following Wednesday's announcement that the Fed would do nothing for the time being to taper off on its $85 billion monthly quantitative easing program.

Even after the pullback that ensued later in the week, the Dow Jones Industrial Average managed to eke out its third consecutive weekly gain to close Friday at 15,451.09, up 0.5% from the prior week's 15,376.06. The more speculative end of the stock market, including penny stocks, outperformed the 30 DJIA stocks, with the NASDAQ rising 1.4% and the penny stock-rich Russell 2000 up 1.8%.

Last week's news releases were indicative of a mixed bag for the U.S. economy:

--Industrial production rose by a higher-than expected 0.4% in August, after flatlining in July. Capacity utilization as expected notched up to 77.8%, from July's 77.6%.

--Tuesday morning's consumer price index update, which was the last inflationary indicator to go public ahead of the Fed announcement, showed price growth actually slowing down, with both the headline and the "core" CPI rising by a lower-than expected 0.1% for August, down from July's 0.2%.

--On Wednesday morning, investors were looking to an uptick in housing starts for August, to 910,000, from July's 896,000. Instead this number came in at a disappointing 891,000. Building permits, which had been expected at 943,000, the same rate seen in July, came in at a lower-than-expected 918,000, a drop from July's upwardly revised 954,000.

--Thursday's existing home sales report, on the other hand, actually beat the market consensus, coming it at 5.48 million for August, up from July's 5.39 million.

Looking ahead at this week, penny stock investors should pay close attention to:

-- On Wednesday morning, the market is expecting to find out that orders for durable goods rose 0.5% in August, following a 7.4% drop recorded in July.

-- Later that morning, the report on new homes sales for August is expected to weigh in at 415,000, a rise from July's 394,000.

--  On Thursday morning, both personal income and personal spending figures are expected to show slight growth. Look for August income to have risen 0.3%, up from July's 0.1%, and spending to have gone up 0.2%, following July's 0.1%.