Blog : Penny Stock Week: We Should All Be Rich Already

by Ed Zwirn on April 28th, 2014

Look for the stock market this week to continue its recent up-and-down trading pattern, as investors confront an unsettled international situation, a heavy earnings calendar and a crowded list of economic reports, including a Q1 GDP update and April's jobs report.

This follows a week which saw the market for everything from penny stocks to blue chip shares take a bath amidst continuing signs of a domestic economic recovery. Working down the ladder, the 30-stock Dow Jones Industrial Average closed Friday at 16,361.46 off 0.3% from the previous week's 16,408.54, but still a healthy distance from 16,026.75 closing the week before that.

In a bearish signal, the broader market, including smaller and more speculative stocks, has performed even worse, with the NASDAQ composite losing 0.5% and the penny stock-rich Russell 2000 small-cap index down 1.3% on the week. Unlike the Dow, both NADSDAQ and Russell 2000 remain below levels seen two weeks ago.

Last week's relatively light economic calendar was indicative of continued growth, with a strong showing for durable goods orders complicated by a mixed showing for real estate.

-- Tuesday morning's existing home sales report for March came in only slightly lower than expected at 4.59 million, following February's 4.6 million. A more sobering figure came in Wednesday, with news of only new homes sales for March, down from February's upwardly revised 449,000. This morning, on the other hand, has brought word that pending home sales increased by 3.4% in March, following February's 0.5% decline.

-- The most unequivocally good news came Thursday, with the report of a much higher than expected 2.6% increase in March orders for durable goods. This headline number, which had been expected to increase 2%, looks good enough, but it gets better when you drill down beyond the increase in transportations orders (notably aircraft) that drove part of the rise. The consensus had called for a rise of only 0.5% excluding transportation, but was taken by surprise by a 2% spike, a whopping acceleration over February's 0.1% rise and an indicator that spending is increasing in broader sectors of the industrial and consumer sectors.

Looking ahead this week, crowded is the only way to describe the calendar confronting investors, who will be kept busy comparing Q1 earnings reports on specific companies to news updates expected to show bullish economic indicators, culminating with Friday's jobs report:

-- Analysts are expecting to hear word Wednesday of a government preliminary estimate of Q1 GDP at 1%, not surprising given the slow pace of growth seen for the period for most economic indicators. Q4 GDP growth was most recently measured at 2.6%.

-- On Thursday morning, the consensus is calling for a reported rise of 0.4% for March personal income, up from February's 0.3% rise. Personal spending is expected to outstrip personal spending to rise 0.6%, following February's 0.3% increase.

-- Later that morning, the market is expecting a 0.4% rise for March construction spending, up from February's 0.1% increase.

-- Thursday afternoon will see the April figures from the auto and truck industries. Auto sales for March came to 5.5 million, while truck sales weighed in at 7.6 million.

-- Friday morning's showstopper will be the latest jobs report, which is expected to show the addition of 205,000 jobs to the national payroll in April, up from March's 192,000. The unemployment rate is expected to tick down once again, from 6.7% to 6.6%. Hourly earnings are expected to rise 0.2% after holding flat in March, while the average workweek is expected to hold steady at 34.5 hours.

-- Later that morning, March factory orders are expected to show a 1.6% increase, continuing February's pace.     

The takeaway for penny stock investors: All indications point to a continued rough patch for stocks, with the more speculative ends of the investment spectrum bearing the brunt. At the same time, assuming the solid economic outlook seen by the investment community is grounded in reality, this would appear to support stocks with solid business plans and enough cash to weather the storm.

Assuming there is a further downturn for stocks, this could therefore provide buying opportunities for investors smart enough to figure out what the next big thing is and dedicated enough to spend the time figuring out which companies stand to prosper as a result. Determining whether a stock is being driven down by the broader market or the company in question has a fundamental problem can prove problematical. But if it were any easier we'd all be rich already.