Data surprises, crude dip bolster small caps
Small-cap stocks finished out the week with a flourish, riding a wave of surprisingly stout economic reports and a slide in crude oil prices to a solid advance Friday. The Russell 2000 (NYSE:IWM) closed up 7.95, or 1.13%, at 710.34. For the week, the small-cap benchmark rose 17.26 points, or 2.49%.
Coming into this week’s action, the economic calendar was quite tame and one would have expected earnings news and energy gyrations to dominate trading direction. While that played out early in the week, today’s session was actually influenced heavily by new home sales and durable goods – two reports that usually are quickly cast off by stock market traders for more influential input.
However, with earnings coming in on a mixed tone the market focused attention toward upside data surprises on durables and home sales, both of which topped analyst forecasts. The bullish surprise on the data front helped soothe investor worries about the consumer spending picture going forward.
As for the data itself, the durable goods report headline figure was reported up 0.8%, well above the median projection for a slide of 0.3%. It should be noted that durables figures can be volatile, the report is somewhat dated (June data) and even today’s rise was questioned in some corners as susceptible to reporting quirks. However, when the new home sales report came in at an annualized rate of 530,000 units, compared with a forecast of 500,000, it kept the economic naysayers in check. What’s more, the previous new home sales report was revised upward. Although it’s too soon to say that the housing market is bottoming, it was a welcome sign of good news just one day after existing home sales slumped to 10-year lows and reflected a 15% decline in prices from last year. It should be noted that existing home sales tower over new home sales in terms of total volume and units.
When the upside data surprise received a lift from a pre-weekend pullback in crude oil prices, it served up the perfect one-two punch to keep small-cap stocks on the rise. Fridays have been awful for the stock market so far in 2008, in no small part tied to the relentless rally in energy markets. However, crude oil prices slipped to seven-week lows and shed about $2 dollars a barrel today to the $124 zone. With gasoline pump prices starting to back off around the country, it could perk up sentiment moving toward next week’s crucial action in equities.
Why is next week such a big deal? Because the economic reports on tap for next week make today’s durables and new home sales releases look like very small potatoes. Next week serves up consumer confidence on Tuesday; GDP, ECI and weekly claims Thursday; then the big monthly employment report on Friday morning. And of course, all of those key economic releases will battle with fresh earnings news and energy price action for top billing. If small caps can extend the recent bounce off the July lows through all that key inflation next week, it could be an important sign of strength for stocks. Conversely, a decisive slide through next week’s action could call into question the power of the July lows.
Peeking at the chart picture in the Russell 2000, the market had a nice upside follow through this week and closed above opening levels for the third consecutive week, which is an important show of strength. Still, the Russell stalled on logical resistance 726 and must conquer that platform next week. On the downside, any slide back below 700 next week could shift the chart structure into a top-heavy position.
Looking at today’s action, broad market sectors on the rise were highlighted by coal, communications equipment, residential REITS, internet software services, wireless telecoms and healthcare services. On the downside, automobile manufacturers, commercial printers, apparel, thrifts and mortgage finance firms, employment services, automotive retail and investment banks were all under pressure.
Individual small-caps of note included Crocs Inc. (Nasdaq:CROX), which collapsed 44% as the firm lowered guidance. Affymetrix Inc. (Nasdaq:AFFX) tumbled 26% on disappointing earnings and The EW Scripps Co. (NYSE:SSP) lost 12%, also tied to soft quarterly results. Small caps on the rally track Friday were highlighted by Ixia (Nasdaq:XXIA), which rose 18% after solid earnings. Horizon Lines Inc. (NYSE:HRZ) jumped almost 25% on solid earnings results and as the firm’s directors voted to declare a regular cash dividend of $0.11 a share.
