Blog : Penny Stock Week: Market Facing Global Headwinds

by Ed Zwirn on January 27th, 2014

The U.S. stock market has opened the week to a mixed showing, with the Dow Jones Industrial Average holding steady and the NASDAQ Composite off nearly 1% as stocks seem likely to face further selling pressure generated by headwinds from overseas.

Asian shares dived on Monday as emerging markets remained under pressure, hit both by concern about a U.S. Federal Reserve poised to continue tapering and tighter credit conditions in China raising fears of a sharper economic slowdown.

Japan's Nikkei share average has ended its session down 2.5% at a two-month low. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.5% to a four-and-a-half month low. Hong Kong's Hang Seng Index tumbled 2.1% to a five-month low.

The losses have spilled over into Europe, where Britain's FTSE 100 is down 1.1% so far today  and Germany's DAX 30 is off 0.3%.

After the worst week for stocks in over a year, U.S. investors face a presidential State of the Union speech Tuesday night, a Federal Reserve meeting which wraps up Wednesday and a host of economic data that may test the current perception that the domestic economy is performing well despite pressure from China and other emerging markets.

The Dow closed Friday at 15,879.11, down 3.5% from the previous week's 16,458.56. The broader market, including penny stocks, tanked along with the 30 Dow blue chip stocks last week, with the NASDAQ Composite down 1.6% and the small-cap Russell 2000 off 2.1%. All three of these indices have seen their year-to-date gains wiped out, with the Dow off 4.2% since Dec. 31, the NASDAQ off 1.2% and Russell 2000 down 1.7%.

Last week's four-day trading calendar was accompanied by a relatively light calendar of economic releases. The "news," such as it was, consisted of evidence of continued plodding progress for real estate, with December existing home sales coming in at a slightly lower than expected 4.87 million, up a tad from November's downwardly revised 4.83 million.

Looking ahead this week we see a much more packed calendar confronting investors:

--Monday morning's new home sales report for December was nothing to write home about, weighing in at a much lower than expected 414,000, down from the prior month's revised (down from 464,000) 445,000.

--Tuesday's durable goods orders report is expected to show a 0.6% increase for December, following November's 1.2% rise.

--Wednesday will give investors their last look at monetary as conducted by Ben Bernanke, who is chairing his last FOMC meeting, just days ahead of when Janet Yellen takes over. Apart from any Bernanke farewell touches, the Fed's two-day meeting is expected to wrap up with an announcement of further tapering of the central bank's quantitative easing program. Trimmed to $75 billion monthly as of January, it is almost universally expected that this bond-buying stimulus will be pared back to $65 billion this time around. That being said, be on the alert for any changes in the Fed's outlook statement (such as a reference to the overseas situation) or the announcement of any possible emergency liquidity measures in this postscript to last week's market difficulties.

--Thursday will see the release of the first estimate of gross domestic product for Q4 2013. The consensus is calling for an increase of 3% to be posted, following the 4.1% Q3 rise seen by the U.S. economy as of the final GDP estimate. Look for a great deal of hand wringing over whether or the rise registered for the U.S. economy in Q3 had been a statistical fluke or evidence of a genuine upsurge.

--Friday will see the release of personal income and personal spending figures for December. Look for personal income to rise 0.2%, the same as the prior month, and personal spending to increase 0.2%, following November's 0.5% spike.

The upshot for penny stock investors: The broader U.S. stock market may have shrugged off news of the Fed's tapering plans when they became apparent last month, but more speculative investments (including penny stocks) at home and abroad are facing pressure as a result of the reduction of stimulus money being pumped into circulation.

Emerging markets, taken together as a group, represent the more speculative end of the speculative market spectrum. This is why they have beaten a retreat with the almost certain prospect of continued tapering. The U.S. domestic economy, on the other hand, has been showing strength of late, even as the outlook from Europe has improved. This week, as it unfolds, will do much to determine whether these relative U.S. strengths persist and whether investors judge that this domestic strength is sufficient to counterbalance international weakness.