Mixed early signals give way to nice recovery
Small-cap stocks edged higher Thursday, a nice reversal from this morning when the market appeared to be in freefall mode after investors received a mixed bag of economic data, another batch of awful profit reports and remained in full fret mode about the government’s bank rescue and fiscal stimulus plans. In the end, the Russell 2000 (NYSE:IWM) closed up 2.47, or 0.55%, at 450.42. Small-caps are now down 9.8% for the year, while the Dow is off 9.6% and the S&P 500 is down 7.5%.
After spending most of this week digesting policy news out of Washington, the market got a chance today to divert attention back toward economic data, but the result was an upside surprise on retail sales that was basically impossible to accept at face value versus a more understandable dour reading on unemployment claims. No surprise there: the bearish claims data won that battle early on.
For those keeping track, the retail sales report showed a monthly rise of 1.0% in January, a far cry from the market’s projection for a slide of 0.7%. A rise in retail sales was deemed dubious right off the bat, and it didn’t help to see things in the report like a 1.6% rise in spending at auto dealers, but a 7.1% decline in unit sales.
“Early weakness was also a function of disappointment over the details of the fiscal stimulus package,” Nick Kalivas, vice president of financial research with MF Global, said in email interview with SmallCapInvestor.com.
Kalivas said that a roaring mid-morning comeback for stocks was fueled by gains in tech stocks, with Apple Inc. (Nasdaq:AAPL) and Research in Motion Ltd. (Nasdaq:RIMM) leading the way. “A favorable analyst note helped AAPL rally, while RIMM recovered from a sharp sell-off Wednesday. Additionally, KO had strong earnings, FCX completed a secondary offering and NTAP could find selling after it released soft earnings overnight,” Kalivas said. In addition, talk that the Obama Administration was developing a plan to slow down the pace of foreclosures helped provide some upside sentiment. Before the opening, RealtyTrac reported a drop in monthly foreclosures, but the year-over-year comparison still reflected double digit gains in foreclosure activity.
The rally seemed to lose traction shortly after midday, likely driven by a report that Goldman Sachs hosted a meeting to discuss the financial bailout plan in the wake of the bruising market reaction to the rollout from Treasury Secretary Timothy Geithner on Tuesday, Kalivas said. He noted that attendees to the Goldman meet were worried about the viability of the bank rescue plan, and reports about the meet simply added to the market’s crisis of confidence.
Energy markets had a little bit of a divergence today between equities and cash, with crude oil prices closing down 5.4%, losing $1.96 a barrel to $33.98 – the lowest close since mid-December. However, energy shares were narrowly higher on the day. Copper prices tanked in the morning, but also found some buying interest as the stock market righted the ship. Still, gold bugs are finding persistent safe-haven buying for the yellow metal amid worries about the stimulus projects from short-term players, and even some long-term positions from those who look for inflation down the road if all these stimulus programs around the world kick-start various economies.
From a charting perspective, the Russell left a very nice bullish pattern on daily candlestick charts known as a “hammer” (because the pattern literally looks like a hammer). The fact that the market rallied back to a positive close after slipping through morning support was an important show of strength. This is an area that roughly corresponded to the November lows in the Dow and January lows for the S&P 500 and Russell 2000, and buyers in this zone are still willing to ante up for a try at the buy-side of things. Looking ahead to Friday’s session, there is a morning report on consumer sentiment at 10:00 a.m. ET that could stir some volatility, but investors will most likely once again eschew economic data in favor of bank rescue news, stimulus details and profit reports.
