Opening rally on auto rescue; energy still slumping
Small-cap stocks opened higher, bolstered by news that the White House extended a rescue loan to beleaguered automakers, which sparked money flow into stocks and away from credit markets. Commodities are on weak footing this morning and credit ratings for a bevy of financial firms were lowered overnight, which could limit some buying enthusiasm. Investors will be on the lookout for pockets of unexpected volatility today as “quadruple witching” expirations take place. At 9:53 a.m. ET, the Russell 2000 (NYSE:IWM) was up 11.67, or 2.44%, at 490.84.
The White House this morning announced plans to extend a bridge loan to automakers, tapping TARP funds for $13.4 billion. The deal includes various restrictions, including executive pay caps and will allow a second draw from TARP funds in February. Investors embraced the news, erasing a 1% slide in stock index futures overnight in anticipation of the announcement. Shares in General Motors Corp. (NYSE:GM) were up 13% shortly after the open, while Ford Motor Co. (NYSE:F) was up 8%. GM said they would hold a press conference at 11 a.m. ET.
Speaking of TARP issues, Treasury Secretary Henry Paulson said this morning that he will go to Congress to ask for the second half of the TARP funding, which means that $350 billion has been spent and they want to start rolling out the second $350 billion soon. Paulson said he would go to Congress when “everyone agrees” it is the right time, in a clear attempt to avert rancorous political situations this time around, as it seems unlikely Congress will simply rubber stamp the funds like they did the first time around.
Today marks “quadruple witching” expirations for various stock derivatives products, which could stir a little extra volatility into the pot. There is always a sense of the unknown into a big year-end expiration like today, but my general rule is to expect an expirations bias in the direction of the dominant quarterly trend … even though we’re well off the lows, that would still suggest a bearish bias for expirations.
Heading into today’s action, stock markets overseas were on the defensive, with Asian equities slipping about 0.6%, pulled down by weakness in energy and commodity markets. With the U.S. dollar in rally mode this morning (up about 2% against the euro), it’s likely that commodity markets in general will struggle. As for crude oil, the market on “black gold” was down about $1.50 a barrel into the stock market open, which could weigh on energy shares again today after that sector was the main drag on stocks Thursday. Shortly after the open, energy stocks were actually up about 1%.
Perhaps obscured by this morning’s auto enthusiasm was news that credit ratings agencies were busy downgrading financial and bank companies overnight. Moody’s downgraded Citigroup Inc. (NYSE:C), while Standard & Poor’s downgraded about a dozen firms. Citigroup shares were off 0.4%, but the Financial Select Sector SPDR was up 1.4%.
Individual small caps of note this morning included MAP Pharmaceuticals, which gapped higher and gained 47% on news of a deal with AstraZeneca (NYSE:AZN) to develop a pediatric asthma drug. China Eastern Airlines Corp. Ltd. (NYSE:CEA) rose 12%, jumping in response to news out of China overnight that jet fuel prices were cut by the Chinese government. On the downside, Gardner Denver Inc. (NYSE:GDI) fell about 13% as the maker of air compressors said that they would slash 9% of their workforce while reducing their outlook.
Price action Thursday was decidedly bearish for small-caps, but the market was trying to quickly right the ship this morning. The Russell quickly charged toward a retest of resistance in the 491 zone, an area that has repeatedly turned back rally attempts in recent weeks. Above 491, there another mild test near 494, then the next upside spot to watch is near 504. On the downside, another failure at 491 would leave support at 473.
