Blog : Penny Stock Week: The Good News Bulls

by Ed Zwirn on December 9th, 2013

Look for the market for everything from penny stocks to blue chips to tread water within a narrow trading band as investors brace themselves for what may be Ben Bernanke's swan song next week as chair of the U.S. Federal Reserve Bank.

Markets are so far trading generally on the upside Monday, with the Dow Jones Industrial Average up 0.14% and the broader NASDAQ Composite up 0.32%. Penny stocks, on the other hand, continue to languish so far today, with the small-cap Russell 200 index off 0.28% as of this writing.

This follows a week which saw the DJIA break its eight-week winning streak, closing Friday at 16,020.20, down 0.4% from the prior week's 16,086.41. Penny stocks and mid-sized companies scored a mixed performance, with the NASDAQ Composite gaining 0.1% and the small-cap Russell 2000 down 1%.

But the markets actually did an interesting about face last week, initially losing ground following a better-than-expected construction spending report which suggested to some that the economy was picking up and that the Fed would tighten up on its expansive monetary policy. By Friday morning, with investors in apparently better shape to accept "good" news, a strong jobs report prompted a gain in most market segments, with the DJIA reversing much of the loss it had incurred over the previous few days, to rise about 1.3% on Friday alone.

Last week's economic releases were generally upbeat:

--Monday morning's construction spending report had been expected to show a 0.4% rise for September, following August's 0.6% increase. Construction spending for October had been expected to rise 0.3%.

The October figure proved to be a surprise, coming in with a much higher-than-expected 0.8% rise, its highest rise since May, following a September decline of 0.3%, which was a worse performance than the consensus had called for.

--Tuesday afternoon's auto and truck sales figures for November, also showed strength, with the auto figure coming in at 5.7 million, up from October's 5.4 million, and truck sales hitting 7.1 million, up from 6.5 million.

--On Wednesday morning, we found out that new home sales for September came in at a lower-than-expected 354,000, a fall from August's 421,000. New home sales for October, which had been expected to total 420,000, actually beat the consensus to total 444,000.

--On Thursday morning, investors were treated to a much more rosy take on the economy in general than they had previously been given, courtesy of a large spike in the latest estimate of GDP for Q3. The government's Q3 gross domestic product figure had been expected to undergo an upward tweak to show a 3% rise, up from both the 2.8% initial estimate (itself the best gain since Q3 2012) and the 2.5% increase seen in Q2. Instead, as we now know, the economy rose by a whopping 3.6%, according to the latest estimate.

--Also on Thursday, factory orders fell by a slightly less than expected 0.9%, following September's upwardly adjusted 1.8% rise.

--But it was Friday's non-farm payroll report that did much to reassure investors worried about the progress of the U.S. economic recovery. This was the first jobs report unaffected by the confusion generated by October's government shutdown, and it showed a continuation of steady labor market progress.

According to the latest, the U.S. economy added 203,000 jobs last month, a good showing compared to the 188,000 consensus, following October's 204,000. Surprisingly, the unemployment rate fell to 7%, from 7.3%. At the same time, personal income, as of October, was reported down 0.1%, after rising 0.5% in September. This income decrease notwithstanding, personal spending rose 0.3% in October, after going up 0.2% in September.

Looking ahead this week:

--Thursday's retail sales report is expected to show a 0.6% November increase, up from October's 0.4%. Excluding autos, the rise is expected to be 0.3%, up from 0.2%.

--Friday's producer price index report is expected to show little or no inflation for this leading indicator, with the headline figure for November falling 0.1%, following October's 0.2%. Look for the closely watched "core" figure, which excludes energy to show a 0.1% rise, a slowdown from October's 0.2%.

That being said, the market mover going forward will most certainly prove to Dec. 18's Fed monetary policy statement and press conference, the last of 2013 and probably Bernanke's last before Janet Yellen takes command in January. Of course, this will be closely watched for any hints that a "tapering" of the Fed's $85 billion monthly quantitative easing is in the offing.

On the other hand, it seems likely that a Fed tapering announcement is "baked into the pie" for some time between now and March, and if the reaction to Friday's jobs report is any indication, investors may have already moved past that in their reckonings and are glad for any good news they can get.