Modest gain; data, M&A battle job loss worries
Small-cap stocks eked out a modest advance Monday, enduring an up and down session in which better-than-expected economic data and enthusiasm about M&A activity dueled with bank worries and job loss jitters. In the end, the Russell 2000 (NYSE:IWM) closed up 5.70, or 1.28%, at 450.06. For the New Year, the Russell is now down 9.9%, while the Dow is off 7.5% and the S&P 500 is down 7.3%.
On the data front this morning, reports on existing home sales and leading indicators both beat the forecast for a rare upbeat showing out of economic data. The National Association of Realtors said that existing home sales rose 6.5% in December to an annual rate of 4.74 million units, well ahead of the projection of 4.40 million. As for leading indicators, the Conference Board said that an index of economic indicators rose 0.3% in December, which also was a much better showing than the forecast for a drop of 0.3%. It also marked the first rise in leading indicators since June.
The market will get more information on the housing sector via Thursday’s new home sales report, but the bulk of homes sold in America come via existing home sales, so today’s report was truly a ray of sunshine for a market that is teetering back on the verge of the bear market lows from November. The Russell is now down more than 13% from the January peak and last Friday generated the lowest weekly close since those bear market lows were carved out in November and the second-lowest weekly finish in more than five years. There is a large segment of market watchers who believe that the economic collapse started in the housing arena and the recovery won’t start until home prices stabilize and start to work higher. That camp got a rare positive signal today.
In addition to the economic data, a massive acquisition in the pharmaceutical arena was announced this morning before the open, with Pfizer Inc. (NYSE:PFE) — the world’s largest pharma firm — announcing plans to buy Wyeth (NYSE:WYE) for $68 billion, the largest deal in that sector for years. Pfizer shareholders didn’t care much for the news because the company will cut dividends to help pay for the purchase, and PFE shares retreated some 10%. From an overall market standpoint, just the thought of a big M&A deal buoyed investor sentiment — remember, if there are big deals getting done on large caps, then there are plenty of bargains to be had for small caps, too.
While the acquisition news and relatively upbeat economic data established a bullish base for the session, the market was nipped away in early afternoon trading by nagging worries about banks, ongoing sloppy corporate profits and mounting job losses. Several major Dow companies came out with earnings reports today and one thing most had in common were plans to slash jobs to cut costs in 2009.
The worst of the reports clearly came from heavy equipment giant Caterpillar Inc. (NYSE:CAT), which said it was slash a jarring 20,000 jobs while warning that 2009 profits would be under stress. When combining reports out of Europe and the United States today alone, about 70,000 employees are facing the ax soon, and that’s just from today’s news releases. CAT shares shed about 9%.
One source of strength today for stocks came from the energy sector, where shares for the group rose about 2.5% despite a slide in crude oil futures, which dipped 1.5% on the day, losing $0.74 a barrel down to $45.73. Crude oil traders are worried about a rising tide of inventory amid slack demand, and have been closing tracking action in stocks, but U.S. crude futures closed ahead of the afternoon recovery in equities. Commodities in general rose slightly on the day, with the Commodity Research Bureau Index up 0.6%, underpinned by a drop in the U.S. dollar. The greenback fell some 1.7% against the euro.
Individual small caps on the rise Monday were highlighted by RXi Pharmaceuticals Corp. (Nasdaq:RXII), which rose 19% amid news of a collaboration with the University of Massachusetts Medical School. Anaren Inc. (Nasdaq:ANEN) rose 17%, closing above the 20-day moving average for the first time since Jan. 8. Homebuilder shares were a strong performer amid the positive report on existing home sales, and small-cap homebuilder Lennar Corp. (NYSE:LEN) jumped 13%. The biggest percentage movers today were dominated by small banks and financial institutions (the KBW Banking Index tumbled 1.7%); outside of that arena, CBL & Associates Inc. (NYSE:CBL) tumbled 14% as the shopping mall developer and owner fell to the lowest close since early December.
Looking at the chart picture for small caps, the market is basically waffling up and down in the range set on Obama’s inauguration day. A decisive breach in either direction of that range (defined by 466.45 on the upside; 433.65 on the downside) would suggest a target move of some 33 handles. Today’s rise in the Russell fit with the doji pattern from Friday’s session, but did little to alter any other aspect of the current chart picture. In fact, one could argue that today’s close set up a short-term bearish pattern on daily charts, similar in scope to the bullish doji from Friday’s action. The best thing about Monday’s session is that the market managed to climb back above 450 by the close. Persistent action above that point is needed to fend off a hard retest of the November lows. Looking ahead to Tuesday, the market will get a report Tuesday morning on Consumer Confidence, which could help set early trading direction.
