Blog : Penny Stock Week: Stocks Up After Mixed Showing

by Ed Zwirn on February 24th, 2014

The bull is charging rapidly so far in early Monday morning trading, with the Dow Jones Industrial Average up more than 150 points so far and all other indices and market segments following suit, as investors prepare to digest key updates on new homes sales, orders for durable goods and GDP.

This follows a four-day trading week which produced a mixed showing for stocks: Large- and mid-cap companies languished, with the Dow Jones Industrial Average breaking its recent winning streak to close Friday at 16,103.30, down 0.3% from the previous week's 16,154.39 and the broader NASDAQ Composite down 0.9%

Smaller stocks, including penny stocks, outperformed, with the small-cap Russell 2000 up 1.4% (after rising 2.9% the prior week).

This occurred against a backdrop of domestic economic news that was all either disappointing or subdued, coupled with continuing uncertainty on a global level.

As the Sochi Olympics concluded its final week and the situation in nearby Ukraine heated up, with the U.S. cautioning the Russians against a military strike, unwelcome attention was focused on an unstable (and nuclear armed) part of the world.

That being said, perhaps it was more soothing for the market for investors to shift their attention overseas.

-- For one thing, there was Tuesday's bad news from the real estate sector. Investors had been expecting to hear news of 964,000 housing starts for January, a moderate downtick from December's 999,000. Similarly, building permits had been expected to weigh in at 980,000, down from 986,000.

Instead, investors were treated to the news that there had been a substantial slowdown for these two indicators last month, one that can only be partially blamed on the weather.

Housing starts were found to have totaled only 888,000 in January. On the other hand, December's figure was upwardly revised to 1.048 million. Building permits also disappointed at 937,000, down from December's upwardly revised 991,000.

-- Also reflecting a relatively weak showing for housing was Friday's existing home sales report for January, which came in at a slightly lower-than-expected 4.62 million, off a tad from December's downwardly revised 4.7 million tally.

The latest news on inflation has also been indicative of a cooler economy:

-- Wednesday's producer price index came in as expected, showing a 0.2% rise for  January. On the other hand, the earlier report of a 0.4% PPI spike for December was downwardly revised, to 0.1%. Core prices for January, which had been expected to rise 0.1%, actually rose 0.2, the same as the prior month's downwardly revised reading.

-- Thursday's January Consumer Price Index also matched the consensus forecast, showing a 0.1% rise for consumer prices, following December's upwardly revised 0.3% increase. The less volatile and more closely watched "core" figure, which excludes food and energy, is also rose 0.1% as expected, the same as the previous month.

Looking ahead this week:

-- Wednesday morning will see the release of a report expected to show 400,000 of new home sales for January, down from December's 414,000.

If this proves to be the case, or if this figure actually disappoints the market, this would tend to undercut the hopeful view that the housing slowdown is temporary and partly driven by the weather. While the information on housing starts and building permits released last week were bad news indeed, they could at least be explained by the absences of homes to buy and the higher costs. New homes are another matter, but the building permits downturn is not a good sign.
 
-- Thursday's durable orders report is expected to show a 1.1% decrease for January, which is not too shabby when you consider that December saw a 4.2% decrease. Excluding transportation, expect a 0.3% decline, following the 1.3% drop reported in December.

-- Friday's second GDP estimate for Q4 2013 is expected to confirm word of a slowdown that began late last year.

In a December penny stock blog, I attempted to capture the euphoria prompted by the release of a final Q3 GDP report showing that the economy had grown 4.1%, its best showing since 2011. Economist at that time even speculated that this news could prompt them to boost their growth estimates for 2014, assuming the Q3 figures did not prove to be a fluke.

Well the evidence is in and so far (two months later) it appears that Q3 was in fact a fluke. The consensus expects the second estimate for Q4 GDP to be downwardly revised to 2.6% from the initially estimated 3.2%, showing that news of a slowdown has already been "baked into the pie."

The upshot for penny stock investors: With growth slowing down and the Fed on a predictable course for at least the next several months, the recent rally seen for penny stocks in general shows a healthy measure of risk appetite among investors all the same. Yields are still low by historical standards, and all indications point to a continuation of this trend. This means that investors, both small and large, are still showing a venturesome spirit, a healthy sign amidst other troubling indicators.