Blog : Penny Stock Week: Yellen Has Her Work Cut Out For Her

by Ed Zwirn on January 6th, 2014

As key players return in earnest from the holidays, the stock market is putting in a poor showing so far Monday morning, with major market indices down and a new U.S. Federal Reserve Chair set for confirmation.

With center stage this week to be occupied by Friday morning's jobs report, this inconclusive action is likely to continue for a few days.

The only tradable news so far has come in the form of this morning's factory orders report, which showed a better-than-expected 1.8% rise for November, following October's adjusted 0.5% decline.

But wrinkles are possible on Monday, as the U.S. Senate votes on the confirmation of Janet Yellen to succeed Ben Bernanke at the helm of the Fed. While the outcome is not in doubt, with the Yellen vote almost certain to succeed, there remains the possibility that Senators today could force the nominee into further declarations about her take on monetary policy.

Yellen, who has often called for continued Fed stimulus to combat unemployment and stimulate the broader economy, has been widely seen as the darling of Wall Street as a result. Her selection for the post by the Obama administration in October paved the way for the stock market rally seen late last year, but further gains to the upside from today's vote are not to be expected, as this outcome has been priced into the market.

This follows an abbreviated trading week which saw the market for everything from penny stocks to blue chip shares tread water in light volume , with the Dow Jones Industrial Average closing Friday at 16,469.99, virtually unchanged from the previous week's 16,478.41.

Penny stocks and mid-sized companies fared slightly worse last week, with the NASDAQ Composite off 0.6% and the small-cap Russell 2000 down 0.4%.

Economic news released last week was mainly of a positive nature, showing continued recovery of the real estate and construction sectors and a soft landing to a very good year in motor vehicles

--Pending home sales for November, which had been expected to show a 1.2% rise, instead rose by only 0.2%, an improvement over October's 1.2% drop, revised from the previously reported 0.6% decline.

--Prices for real estate, on the other hand, are continuing to advance, according to the S&P/Case-Shiller 20-city home price index, which showed a 13.6% rise for October, slightly below the consensus forecast but above September's (downwardly revised) 13.2%.

--Thursday's Commerce Department report on November construction spending started the New Year with renewed evidence of a continuing economic advance, as I noted in my Friday investment blog. According to the report, U.S. construction spending rose by a higher-than-expected 1% in November, driven primarily by private housing construction, the best showing for this indicator since March 2009 and an improvement from the 0.9% rise (upwardly revised from 0.8%) posted in October.

--On Friday, investors found out that the U.S. motor vehicle sector made a soft landing in December. Capping a year which saw overall vehicle sales up 8%, December auto sales weighed in at 5.3 million, down from  November's 5.7 million, while truck sales, which came to 7.1 million in November, slid to 6.6 million. Industry analysts attribute the fall to both the cold weather and the fact that many sales incentives had come to an end last 
 
Looking ahead this week, Friday's December jobs report will hold center stage. As I wrote in one of my earlier penny stock blogs, November saw the addition of 203,000 jobs, following October's 200,000. The unemployment rate declined in November to 7%, from 7.2%.

The consensus is calling for this moderate progress on the jobs report to have continued through year end, with 203,000 jobs added last month. In addition, the market is expecting the unemployment rate to hold steady, at 7%.

In any case, investors are so far treading lightly into 2014, even in the face of relatively good economic news. While the atmosphere is basically bullish, there remains a substantial minority of active and/or sidelined investors looking to the future apprehensively, having been burned in the not-too-distant past.

The upshot for penny stock investors: Janet Yellen has her work cut out for her, and, with prospect of any stimulus from the government as remote as a human Mars landing, the Fed remains the only game in town. Even though her predecessor did her a favor by laying out the rules for a tapering of the Fed's $85 billion monthly bond-buying program, there remains considerable softness in investor sentiment, softness than can serve to raise the stakes on any Fed contemplation of policy changes.

Of course, the presence of this bearish minority can be called a safeguard against irrational exuberance (to steal Fedspeak of a bygone era) on the part of the investing public. On the other hand, the good news seems to keep on coming, so I'm staying optimistic (if not exuberant) for the time being.