Banks lead big morning rally
Small-cap stocks jumped higher this morning, buoyed by a rush back into bank and financial stocks amid hope that the government will set up a “bad bank” facility to mop up losing bank investments, which would help clear bank balance sheets. In addition, there is a sense that the Obama Administration is moving back toward the original purpose of the TARP of absorbing bad debt paper, a concept that has repeatedly sparked brief rallies in equities. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was up 9.15, or 2.01%, at 464.73.
Financial and bank stocks were the preferred outlet for bulls this morning. Huge percentage gains were seen for a vast array of banks; Citigroup Inc. (NYSE:C) was up 20% shortly after the open, while Wells Fargo & Co. (NYSE:WFC) was up 19%. The KBW Banking Index was up nearly 10%. Of course, it’s easier to generate jaw-dropping percentage gains on stocks that are only a fraction of where they were a year ago.
There is a chance that some of the enthusiasm on the financial and banking front has also been stoked by optimism ahead of this afternoon’s FOMC statement. With the Fed funds rate effectively near zero, one wouldn’t expect FOMC to carry much weight right now, but there is a chance that the Fed could talk up “non-traditional” means of providing liquidity and putting downside pressure on longer-term rates. The FOMC statement is slated for 2:15 p.m. ET.
The focus on banks and hope for quick action on bank balance sheets via troubled asset relief programs from the government might have diverted attention away from gloomy earnings for a bit, but even the earnings news today has some bright spots that are attracting attention. Over across the pond, business software maker SAP AG topped the earnings forecast and helped European shares move toward a sizable 3% gain into the U.S. open. Here in the U.S., Yahoo Inc. (Nasdaq:YHOO) also topped the forecast, but the internet search engine company did have some caution notes about advertising demand and the upcoming year. In addition, Sun Microsystems Inc. (Nasdaq:JAVA) beat the estimate; early on, JAVA was up 6% and YHOO up more than 5%.
Not to put a damper on the early rally, but the weekly MBA Mortgage Application Index tumbled 38.8% to 732.1% and is now at the lowest point since the week ended Nov. 21 (which also coincided with the bear market crash bottom in stocks). In essence the MBA index has now given back all of the dramatic surge late November and December, which is a little disconcerting. Remember, it was a dramatic resurgence in mortgage application activity that helped trigger a big run for homebuilder stocks…if that activity is just as suddenly drying up it could hamper not just homebuilders, but the entire market. With the market sharply higher this morning, the MBA Index clearly didn’t spook investors, but it’s still a potential warning sign in the mix.
Individual small caps on the move early today included VistaPrint Ltd. (Nasdaq:VPRT), which gapped higher and gained 39% after the small business marketing specialist released quarterly results. Small-loan consumer finance company World Acceptance Corp. (Nasdaq:WRLD) also gapped higher and rallied 20% on solid earnings news. Regis Corp. (NYSE:RGS) charged 24% as the beauty salon and hair restoration company reported earnings. On the downside, Century Aluminum Co. (Nasdaq:CENX) tumbled 30% as the firm announced plans for a common stock offering. Plantronics Inc. (NYSE:PLT) was down 9% as the headset maker took an earnings-related hit.
Looking at the chart structure, the market is moving toward a test of the recent range highs near 466.45, which coincide with the inauguration day collapse. A convincing breakout above that point would suggest a 33-handle upside target run toward 499. If the market stalls today, then support will be at 454, then at 449 and 439.
