Amazing rally lifts Russell
A day of rollercoaster trading ended with a late turnaround that lifted the Russell 2000 (NYSE: IWM) to a gain of more than 2%, while the Dow almost broke even. The small-cap index added 17.29 points, or 2.30%, to 768.83, snapping a three-day losing streak. The Dow Jones Industrial Average (INDU) fell 15.69 points, or 0.12%, to 12,845.78, its sixth consecutive decline.
Stocks were volatile today, with the Dow twice falling more than 300 points and the Russell bouncing on both sides of the flat line, shedding more than 1% at 1 p.m. ET before swinging just as much in the opposite direction less than two hours later.
The morning began with bearish news that housing starts in July decreased 6.1% to a seasonally adjusted 1.381 million annual rate, the lowest in 10 years. Economists were expecting a more modest decline to an annual pace of 1.41 million, following an increase of 2.1% in June to 1.47 million.
That indicates that the slump in the U.S. housing sector, which began in the second half of 2006 and has since resulted in a wave of foreclosures and delinquencies, is not letting up.
Builders are struggling with sagging demand and lower prices, the fallout from the ongoing mess that started in the subprime mortgage sector.
On Wednesday the National Association of Home Builders/Wells Fargo reported that its index of builder confidence fell to its lowest level in 16 years.
The troubles in the housing sector are going to be a drag on economic growth, according to U.S. Treasury Secretary Henry Paulson.
Commenting on the economic situation this morning, Paulson said that the economy will slow without falling into recession.
Also feeding the bears’ appetite was news that Countrywide Financial Corp. (NYSE: CFC), the country’s largest mortgage lender, announced that it had to take out an $11.5 billion bank credit line in order to continue making loans.
Investors interpreted that as the latest sign of spreading fallout from the meltdown in the subprime mortgage market.
Trading in small-cap stocks was choppy while most other equities were solidly in the red.
That lasted until 12 p.m. ET, when the Philadelphia Federal Reserve Bank reported that manufacturing activity in the mid-Atlantic region didn’t increase in August.
An hour later stocks hit their lowest levels of the day, but the rollercoaster had not run its course just yet.
Stocks rebounded, with the Russell 2000 at one point about 10 points above its breakeven level.
The indices fell again, bottoming out at about 3 p.m. ET.
That’s when stocks began shooting higher, led by what some analysts attributed to a short-covering in the financial sector.
The wild ride and the steep declines that preceded the sudden burst of buying fueled speculation that the U.S. Federal Reserve would move to cut interest rates in the immediate future. There was no official information to back that belief, but the Fed did pump an additional $17 billion into money markets today to boost liquidity.
