Blog : Penny Stock Week: Where in the World?

by Ed Zwirn on May 12th, 2014

You know how it can be these days. You turn on the car radio in the middle of a news broadcast about some horrific human tragedy unfolding somewhere on the globe. As reported atrocities and casualties are cited, it may take a few more lines of broadcast before you can figure out where they're talking about.

With so many possible answers to that question at the present juncture, investor attention is liable to waver, especially in a week expected to be relatively light on more benign (hopefully) economic indicators. The destabilizing impact of developments in Ukraine, where the West has rushed to reject Sunday's separatist referendum, not to mention the abducted schoolgirls of Nigeria, are likely to grab more attention than Wednesday and Thursday's PPI and CPI figures, for example.

This follows a week which saw a pronounced flight away from speculative stocks while the big boys continued to flirt near record levels. The 30-stock Dow Jones Industrial Average built on earlier gains this week to close Friday at 16,583.34, up 0.4% from the previous week's 16,512.89.

At the same time, the broader market, including smaller and more speculative stocks, took a bath, with the NASDAQ composite losing 1.3% and the penny stock-rich Russell 2000 small-cap index down 1.9% on the week.

This decline is showing signs of reversing itself in early Monday morning trading, with both the NASDAQ and Russell 2000 up sharply, and the Dow accumulating more gain.

The market has shrugged off the Ukrainian crisis for now, and is paying attention to relatively good news from China, where the government has repeated its desire to open more state-owned companies to outside investment. But the market dichotomy caused by a destabilizing world situation continues, with a strong surge of energy stocks propelling large-cap company-based averages to new highs while average stocks remain vulnerable.

This vulnerability is underscored by recent fund flows. During the week which ended May 7, institutional investors initiated the highest outflow from U.S. equities since the first week of February, according to EPFR Global. The big bearish gainers were bond funds, which took in $9 billion, and money market funds, which netted $35 billion. Significantly, commitments to volatility funds hit their highest level in 12 weeks.  

Economic releases due out this week include:

-- Tuesday's retail sales report, which is expected to show a 0.3% rise for April, a slowdown from March's upwardly revised 1.2% increase. But the April advance will be broad-based, coming in at 0.6% excluding the auto sector, down from March's 0.7%.

-- The consensus is calling for Wednesday's producer price index report to show a 0.2% rise for April, a slowdown from March's unexpected 0.5% spike. The core PPI, which rose 0.6% in March, is also expected to rise 0.2% this time around.

-- Taking the inflationary outlook to the next level, the market is expecting a 0.3% consumer price index increase to be reported for April on Thursday, up from 0.2%, driven by food and energy price rises. Excluding food and energy inputs, the closely watched "core" CPI is expected to rise 0.2%, the same rate of increase seen in March.

-- Friday is expected to bring word of a modest rise for key real estate figures. The consensus is calling for April housing starts to weigh in at 975,000, up from 946,000. At the same time, building permits are expected to be reported at an even million, up from March's 990,000.

But these updates seem to have little potential to do much to alter the present outlook. The U.S. Federal Reserve policy seems so preset at this point that it seems to make little sense to parse the latest inflationary figures for clues as to how this would affect the reduction of quantitative easing, which will proceed apace, or the advent of higher interest rates, for which don't hold your breath.

These may suggest a stabilizing pull on the stock market, but there are reasons why institutional investors are betting big on increased volatility, the divide between large-cap stocks and their smaller counterparts being chief among them. Despite the relatively strong progress seen in domestic business conditions, U.S. stocks continue to face a range of global distractions.

For some stocks, these distractions may prove an unmixed blessing, both as energy and commodity prices spike due to uncertainty and as equity investors seek less speculative stocks. There are penny stocks that stand to benefit from these spikes, particularly as mining and alternative energy become more economically attractive. On the other hand, even companies like these could be hurt if broader market sentiment turns against them and inhibits investment and funding.

But sentiment can be a tricky commodity in-and-of-itself. There have of course been studies about investors and traders and their reactions to the news, and all of these have proven helpful until the coming of the next news-driven debacle One thing is certain: Attention spans are fickle things. I think I'll turn off the radio and pop in a CD before I reach the next rest stop.