FOMC surge pauses on profit news, econ worries
Small-cap stocks opened lower but battled back to steady levels, pressured by profit-taking after Tuesday’s big FOMC rally. Weak profit news on the financial front and lingering worries about the recession prompted a pause in the updraft, which saw small-caps climb to the highest daily close Tuesday since mid-November. At 9:56 a.m. ET, the Russell 2000 (NYSE:IWM) was down 0.11, or 0.02%, at 482.74.
Ahead of the opening, Morgan Stanley (NYSE:MS) announced a larger-than-expected quarterly loss, which could weigh on financial shares early today. MS stock was off 4.3% immediately after the open and financial stocks were on the defensive. Tech stocks were soft early as well, with bellwether Apple Inc. (Nasdaq:AAPL) off 4.6% on concerns about the health of CEO Steve Jobs.
The weekly MBA Mortgage Application Index rose 2.9%, bolstered by a pickup in refinancing, with the MBA’s refinance sub-index climbing 6.5%. The rise in activity was powered by a slide in mortgage rates, which hit the lowest point last week since June 2003. A recent spike in mortgage activity, coupled with talk that the Federal Reserve will target mortgage rates has been a boon to homebuilder stocks, with the ISE Homebuilder Index soaring 78% from the Nov. 21 low. This morning, however, homebuilders appear to be in correction mode with the overall market. On the company news front, small-cap homebuilder Hovnanian Enterprises Inc. (NYSE:HOV) missed the earnings forecast and HOV shares were off 7.5% shortly after the open.
Crude oil prices drifted back and forth between positive and negative territory into the stock market open today, as the market braced for a production cut from this week’s OPEC meeting. Emerging market stocks found support overnight, with Hungary’s beaten down stock market climbing 6% amid gains in oil and gas stocks. Commodities in general should find underlying support from the recent slide in the U.S. dollar, which tumbled to 13 ½-year lows against the yen this morning and was down 1.1% against the euro, at the lowest point against that currency since late September. That said, the only physical product making huge waves right now is the cocoa market, which rose to 22-year highs in London trading, which might not thrill major chocolate manufacturers.
Traders will continue to digest the ramifications of Tuesday’s stunning rate cut by policy makers at the Federal Reserve, even if the news appeared to wear off a tad by this morning. The dramatic rally in equities after the news rated as the biggest one-day response to an FOMC meeting in some 14 years.
“The bottom line is that the FOMC cut its target on the federal funds rate to levels that have not been consistently seen in the post-World War II period, indicating how extremely difficult they view the current economic stress and financial turmoil,” Steven Wood, chief economist with Insight Economics, said in an email. “In addition, the Fed has been greatly expanding its balance sheet to try to resolve some of the dislocations in the financial markets. The committee is prepared to keep interest rates very low for an extended time (an attempt to bring intermediate and long-term rate down), to the direct purchases of long-dated Treasury securities, and to other unidentified uses of its balance sheet. The Fed is scrambling and willing to try anything and everything in an attempt to halt the downward spiral in the economy and the adverse feedback effects onto the financial markets,” he said.
Given the Fed’s willingness to consider “unconventional” approaches to sparking economic recovery, one has to anticipate potential moves in other markets, which could provide a lift to Treasury products. This morning, the yield on benchmark 10-year notes was down a whopping 6%, indicating strong demand for underlying Treasury securities (as yields move inverse to price). If investors are looking for safe-haven outlets or pounding money into Treasury markets, it could siphon away funds from stocks.
Individual small caps on the move this morning include Gibraltar Steel Corp. (Nasdaq:ROCK), which gapped lower and shed 26% building products manufacturer updated guidance and announced the closure of a manufacturing facility. On the upside, Cadence Pharmaceuticals Inc. (Nasdaq:CADX) jumped 48% on news of a positive trial for a post-surgery abdominal pain drug.
Looking at the chart picture for small caps, the Russell neared the 50-day moving average Tuesday for the first time since the collapse caught fire in September. Persistent action above the 50-day M.A. could attract fresh system-related buying and is worth watching this week. From a support/resistance standpoint, look for support today at 473, then at 461. Meanwhile, resistance is at 491 and 504.50.
