Bounce on financials ahead of FOMC
Small-cap stocks opened higher Wednesday, providing a welcome respite to the bulls who endured a slide to two-month lows in the Russell 2000 the previous session. The market was underpinned by short-covering amid oversold conditions ahead of this afternoon’s FOMC meeting announcement and by a bounce in financial stocks. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was up 4.67, or 0.66%, at 712.59.
The new home sales report came in at minus 2.5% and the inventory of new homes was at 10.9 months, which was a mild rise over the previous report. Although the home sales data was weak, it didn’t deter the stock market, which is already focused on the FOMC later today.
Earlier this morning, orders for May durable goods came in unchanged, which was slightly softer than the forecast for a rise of 0.1%. Although durables missed the median forecast, it was close enough to have very little impact on stock market trading.
Also on the data front, the MBA mortgage application survey came in at minus 9.3%, which was the lowest level since July 2001. In addition, the report showed that the purchasing index fell 7.4% to the lowest point since February 2003. Also, the refinance index tumbled 12.1% to the lowest level since July 2001. With the housing market still soft and rates firming, mortgage activity has slowed to a crawl.
Crude oil prices were lower this morning, which allowed some breathing room for this morning’s bounce in U.S. equities. However, stocks remain extremely sensitive to intraday gyrations in energy prices, and any rise in black gold during the session could endanger the early bounce in stocks. The weekly inventory report is slated for release at 10:35 a.m. ET and is widely expected to show a drawdown in crude stocks.
With the market sinking to the lowest point since late April during Tuesday’s trading, it sets the stage for an upside surprise reaction to the FOMC statement. The Fed is expected to talk tough on inflation, and end the rate cut cycle, but the actual reaction to the policy statement is never a sure thing until we see it happen. Fed funds futures are pricing in less than a 10% chance that the policy makers will actually hike rates at this meeting. Deferred Fed funds futures contracts are suggesting that the Fed will move into a tightening mode relatively quickly however, which seems tenuous given we’re moving into an election, unemployment has been rising and the credit crunch seems to always resurface.
From a charting perspective, Tuesday’s breakdown in small caps through key support at 717.50 sets the stage for a new lower trading range. The immediate downside target on this breakdown is at 690. If the market can somehow quickly reverse course today, then resistance is at the aforementioned 717.50 line, then at 720.50. Meanwhile, a resumption of the decline puts support at 704 and 700.
Large-cap stocks in the news this morning that could impact sector pricing and spillover into small caps included AT&T (NYSE:T), which was up 2.5% on upbeat analyst comments. Also, Jabil Circuit Inc. (NYSE:JBL) topped the earnings forecast and rallied 15%.
Broad market sectors on the rise this morning included thrifts and mortgage financial firms, regional banks, diversified banks, other diversified financial stocks, investment banks, construction materials and semiconductors. On the downside, fertilizer stocks, coal, steel, oil exploration and production shares were attracting sellers.
Small caps of note were highlighted by LCA Vision (Nasdaq:LCAV), which tumbled some 14% as the company lowered the outlook for the second quarter. Apogee Enterprises (Nasdaq:APOG) tumbled 13% after posting disappointing quarterly results. Haynes International (Nasdaq:HAYN) was down nearly 9% without any apparent fresh news to power the decline.
On the upside, HireRight (Nasdaq:HIRE) climbed 13%, gapping higher following plans to release a new employee screening product. Gateway Financial Holdings Inc. (Nasdaq:GTBS) climbed 11%, recouping some of the sharp recent losses that pushed the share to multi-month lows. Winn-Dixie Stores (Nasdaq:WINN) were up 8%, bouncing after hitting five-month lows Tuesday.
