Blog : Penny Stock Week: Keep Your Powder Dry

by Ed Zwirn on July 14th, 2014

The market for everything from penny stocks to blue chips is starting the week with another pronounced rally. Individual investors have apparently been persuaded that it is once again safe to get back into the water, with the U.S. economy kicking into full gear and stocks ready to soar to greater heights.

But whether this individual investor bullishness is shared by the big money is up to question. According to a Bloomberg article posted this morning, Main Street and Wall Street are moving in opposite directions, with individual investors plowing money back into the U.S. stock market just as the pros are saying that gains for this year are over.

"If Wall Street, after poring over all known data, comes up with a target and we're already there, and you still see individual investors buying and they're typically the ones that are late to the party, it would seem there is limited upside," Terry Morris, who helps oversee about $2.8 billion of investment at National Penn Investors Trust Co., was quoted as saying.

Limited upside or not, the optimistic opening for the week today once again has the Dow Jones Industrial Average over the 17K level, following a pullback last week which saw the Dow landing Friday at 16,943.82, down 0.7% on the week from the 17,068.26 previously noted on the Peter Leeds site.

The broader market declined even more than the 30 blue-chip Dow stocks, with the NASDAQ composite losing 1.6% on the week. Penny stocks, as represented by the Russell 2000 small-cap index, lost 4%.

Looking ahead this week:

-- Expect Tuesday morning's retail sales report to show a 0.7% increase for June, up from the prior month's 0.3%. Excluding the auto sector, the consensus
calls for a 0.6% retail sales rise, up from May's 0.1% increase.

-- Wednesday morning is expected to bring news of a 0.2% producer price index rise for June, reversing May's 0.2% decline. Look for the "core" figure, which excludes food and energy inputs, to also increase by 0.2%, following May's 0.1% decrease.

This leading inflation indicator precedes July 22's consumer price index update and will (or ought to be) closely watched for anybody trying to get a handle on inflation/deflation and, by extension, the intentions of the U.S. Federal Reserve going forward. The Fed, as recently as last week's release of the Fed's June minutes, has indicated that it will phase out bond buying under its quantitative easing program by October. While it would take a train wreck to derail this outlook, the longer-term path of the short-term interest rates controlled by the Fed is still up to question, and the Fed has targeted 2% consumer inflation.

-- Later that morning, the consensus calls for a reported 0.4% rise for June industrial production, a slowdown from May's 0.6% increase.

-- The latest from the real estate sector will come Thursday morning. Look for June housing starts to weigh in at 1.02 million, up from 1.001 million. Building permits, which came to 991,000 in May, are expected to rise to 1.037 million this time around.

Looking ahead, the summer, while it affords many excellent opportunities for dining al fresco, may well prove to be no picnic for investors. In addition to the jitters prompted simply by the market experiencing highs, there is the deteriorating international situation to worry about. There is actual warfare in Europe, something which has not been seen in over a generation, as Ukraine tries to retake rebellious eastern regions and risks involving Russia in a wider war.

There is also the Middle East to worry about. As of this writing, the casualties caused by Israeli strikes against Gaza are mounting, and it looks like an escalation of this conflict may be easier to predict than the course of the current stock market. Bear in mind that Israel/Gaza are just a few short miles away from the self-proclaimed ISIS caliphate, which is occupying huge parts of Syria and Iraq, and you have an idea of the potential scope of another Middle East conflagration.

That being said, the domestic outlook for the U.S. economy remains as strong as it's been since the start of the recession. As I pointed out in this investment blog recently, the jobs report for June offered what would appear to be unambiguous evidence that we have pulled out of the steep decline seen in Q1. Assuming the recent trends hold up, and people keep returning to work and buying things, there may well be a solid underpinning to the recent performance of the stock market. This would mean that, while the market may well be getting ahead of itself, it is apparently not too far ahead.

In the meantime, as Oliver Cromwell might have put it, if he were an institutional investor, now is the time to "praise the lord but keep your powder dry." The fact that there has been much to praise recently is all the more reason to be ready for anything.