Huge Russell rally as calm is restored in financials
Small-cap stocks took flight Wednesday, as investors embraced a spate of relatively positive earnings results and another slide in crude oil as a sign that the market may have weathered the worst of the summer storm. The Russell 2000 (NYSE:IWM) jumped 24.39, or 3.68%, to 686.75, notching the fourth-largest one-day advance of the year, powered by gains in financial and tech stocks.
The impressive rally topped off a picture perfect validation of a bullish chart pattern from Tuesday’s recovery bounce off fresh move lows, and further upside action this week would cement the most powerful technical analysis bullish signal in months. In addition, the heightened volatility in recent days fits with similar whipsaw price action at the lows back in January and March.
The market was also able to carve out today’s sizable gains despite another serving of bearish economic headlines. When the market starts to work higher in the face of bearish news, it is considered a classic show of strength — especially if the move is powered by more than just short-covering amid oversold conditions. While we wait for further confirmation of the recovery off Tuesday’s lows, let’s recap what the market overcame on the data front today.
The big report this morning was the Consumer Price Index release. For the second consecutive day, the market was slapped in the face with sobering inflation news. The headline figure for CPI came in at plus 1.1%, which was the largest monthly advance in 26 years. What’s more, the year-over-year increase was at a whopping 5%, which is the largest rise in consumer prices since 1991. In short, the CPI news was every bit as troubling as Tuesday’s Producer Price Index report, where the year-over-year figure was the highest since June 1981. And the inflation data simply adds to the woes from slumping housing, GDP and labor market reports of recent months.
So, if we are truly mired in a slow growth, rising unemployment, escalating inflation world, then why on earth did small caps put together such an impressive rally today? The easy part of that question is that crude oil prices tumbled down to $134 dollars a barrel, shaving another $4 bucks off the top and quelling immediate inflation fears in the process. But crude oil price declines have shown to be fickle of late, and the real meat behind today’s push higher was clearly powered by earnings with teeth, and another big M&A deal.
And why not? After all, aren’t we entering into the heart of second-quarter earnings season? Amid worldwide fears about systemic financial risk, bank failures and the relentless write-downs spurred by the credit crisis, the poster child for today’s rally in stocks was clearly Wells Fargo & Co. (NYSE:WFC). With all the teeth gnashing on financial concerns in play, WFC came out this morning with solid earnings and announced they would raise dividends 10%. The news sparked an almost immediate 10-handle recovery in S&P 500 futures and seemed to soothe — at least for a day — the fear about American banking solvency. WFC gained a stunning 32% on the day. Even embattled GSEs Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) fought back today, rising 28% and 30%, respectively.
And the rally wasn’t just about gaining back some of the steep losses in the financial sector. There was good news on the tech front, with chipmaker Altera Corp. (Nasdaq:ALTR) jumping 12% as Q2 revenue topped the forecast, and tech bellwether Intel Corp. (Nasdaq:INTC) posting decent earnings and gaining almost 1%.
On the merger front, we have seen a steady stream of activity going through despite the recent bear market dive in equities. The M&A arena has recently seen big deals in the chemical sector, from beer brewers and today on the physical market front as iron ore pellet maker Cleveland-Cliffs (NYSE:CLF) announced plans to acquire Alpha Natural Resources Inc. (NYSE:ANR) for some $8.3 billion. If there are deals to be found in large caps, then there are definitely bargains to be had within small caps.
Broad market sectors on the rise today were highlighted by diversified banks, regional banks, custody banks, investment banks … you get the picture. Other sectors of strength included automobile manufacturers, homebuilders and hotels — none of which have been doing well the last several months. On the downside, pretty much anything tied to energy was out of favor, with a little gold tossed in for good measure. As for sectors, today was basically the exact opposite of the trends that have been underway for months.
Individual small caps of note included Asyst Technologies Inc. (Nasdaq:ASYT), which jumped some 27% on news that the firm received a buyout proposal from Aquest Systems Corp. for $6.50 a share in cash. InterVoice Inc. (Nasdaq:INTV) gapped higher on unusually brisk volume and rallied 21% on news that Convergys Corp. (NYSE:CVG) agreed to acquire INTV for $335 million. Stratus Properties Inc. (Nasdaq:STRS) surged 25% without any apparent news to fuel the move. Bucking the overall market rally, Orion Energy Systems Inc. (Nasdaq:OESX) tumbled 31% on disappointing quarterly preliminary revenues and revised guidance down for the year. eResearch Technology Inc. (Nasdaq:ERES) lost some 15% on an analyst downgrade.
Looking ahead to Thursday’s action, the market will get fresh data on the housing market and employment, with June Housing Starts and the latest Weekly Claims slated for release ahead of the open at 8:30 a.m. ET. Later in the morning, the Philly Fed survey for July comes out at 10:00 a.m. ET.
