Dramatic rally reverses jobs slide
Small-cap stocks took flight Friday, setting aside a historically bleak employment report amid hope that all those gloomy numbers are already priced into the market. If true, then bargain-hunters are snatching up equities relatively close to the lows, getting ahead of the curve on an impending turnaround in the global economic scene. The Russell 2000 (NYSE:IWM) closed up 21.56, or 4.91%, at 461.09, reversing course on a morning rout that saw small caps down 3.5% at the worst point of the day. For the year, the Russell is now down 40%, while the Dow is off 35% and the S&P 500 is down 40%.
This marked the third time in four days that stock market investors chose to dismiss dreary economic data as a non-event, and this time around they did it on the biggest report of them all – the monthly Labor Department report on employment. Looking at the guts of the jobs report, it’s not that easy to dive into stocks with abandon. Here are some ready-made frightening headlines from the report:
* Largest one-month drop in payrolls since December 1974
* Highest unemployment rate in 13 years
* Fifth largest monthly decline in jobs in history
What’s more, it is widely expected that the jobs picture will get worse – not better – over the next couple of months. So, why did the stock market treat all this bad news as a buying opportunity? Because there is a wide-spread belief that the market has already priced in all of these dreadful economic reports and that upside potential exceeds downside risk.
Financial, homebuilding and retailer stocks powered the advance Friday. All of those sectors have compelling stories right now to seduce potential bargain-hunters. On the financial front, the government has thrown hundreds of millions into the mix to spark lending and they have outright rescued some key firms. On the homebuilding front, a sharp decline in mortgage rates could stoke a new run of activity on the downtrodden housing sector. And on the retailer front, consumer relief at the gas pump and lower mortgage and refinancing rates should heighten spending at the stores.
Speaking of gas prices, the noteworthy drag on stocks today came from the energy arena. Early on today, energy stocks were down some 5%, but they managed to claw back into positive territory by the close, pulled grudgingly higher by the rising tide in other sectors. Crude oil futures finished out the session down $2.86 a barrel to $40.81, hitting the lowest point in four years amid worries about the demand picture as the U.S. battles recession and rising unemployment. What’s more, China and India, the largest nations on earth from a population standpoint, both opted to cut domestic fuel prices for the first time in two years and analysts at Merrill Lynch said crude oil prices could drop to $25 a barrel if China demand slips noticeably.
In fact, today’s slide in energy prices was just part of the overall story in commodities, with the Commodity Research Bureau Index of 19 physical markets sinking more than 4% to six-year lows.
Looking at a list of big percentage movers today in the small-cap universe, financial firms dominated the proceedings. Outside of that realm, Dineequity Inc. (NYSE:DIN) jumped 32% as the operator of Ihop and Appleby restaurants got a boost from a major shareholder saying they would look to maximize value. Athenahealth Inc. (Nasdaq:ATHN) rallied 17% as the Internet physician practices firm shot to the highest daily close since early October on solid volume. Dick’s Sporting Goods Inc. (NYSE:DKS) jumped 18%, getting a ride with other retailer stocks on hopes for a recovery in consumer spending. On the downside, Universal Technical Institute (NYSE:UTI) fell 11% as the technical training school took a nosedive without any apparent fresh news behind the move. UTI had been one of the few stocks trending higher since late October.
It’s easy to get excited about today’s impressive recovery rally in small caps, but when you step back away from things, the market is still trapped within a range defined by last Friday’s high at 473 and Monday’s historic collapse low at 416. Until we get a breakout from that range, this price action is simply sideways meandering. One could argue that it is somewhat foundation building, but that is still overshadowed by the massive dynamic bear market that has been in play for quite some time.
