Russell 2000: Up on crude oil dip, rally in tech stocks
Small-cap stocks edged higher Tuesday, supported by a pullback in crude oil prices, a firm tone in the U.S. dollar, a jump in tech stocks and modest buying from those who saw last week’s damage as overdone. Energy-inspired trades, both on the buy side and sell side, were also a prominent feature in stocks. The Russell 2000 (NYSE:IWM) closed up 10.28, or 1.42% at 734.38.
Despite an extended holiday weekend, trading decisions in equities continued to be directed by the same dominant element that was the focal point last week – gyrations in crude oil prices. When crude oil was higher before this morning’s opening, stocks were lower in pre-market trading, and when the energy market tumbled right before the opening, stocks started higher and held onto those gains throughout the session.
With crude oil taking a breather today, energy stocks became a profit-taking target, and one of the major drags on large-cap index products came from the energy sector. Exxon Mobil Corp. (NYSE:XOM) was off 0.8% and Chevron Corp. (NYSE:CVX) was down 1.2%. Another play on the crude oil decline came from airline stocks—a group that could use a break on the energy front after being hammered for months on end. The AMEX Airline Index was up 3.8% Tuesday, and small cap US Airways Group Inc. (NYSE:LCC) gained 4.5%, small comfort after collapsing 46% last week.
If the oil market can stabilize or drift lower in the next few weeks, it could be a supportive element to both the stock market and to the teetering economic picture. In a research report issued this weekend, Goldman Sachs analysts said that “despite the oil price surge, we continue to expect a modest pickup in growth in the near term (from) the current round of tax rebates.” Goldman went on to say that although the rebates could spur a substantial net support to consumer spending in coming months, a sharp growth slowdown and double dip recession could take place into the fourth quarter. “This is partly because of the oil price surge, whose income effect persists beyond the rebates, but more importantly because of our continued bearish housing and mortgage market views,” Goldman said.
Some of those credit crunch concerns sprouted overnight in European equities trading, and were something of a concern for U.S. markets early today on news that Bank of America slashed earnings projections for Morgan Stanley and Lehman Bros. However, both of those stocks managed to trade solidly higher today and traders clearly were more preoccupied with energy than the credit issue. The small-cap sector is even more exposed to credit concerns because it’s easier for the major large-cap banks to access capital. Typically, when the credit crunch has been a major issue for stocks, small-caps would lead the way down, but the Russell 2000 outperformed both the Dow and S&P 500 handily Tuesday.
On the data front today, consumer confidence hit a 16-year low, new home sales tumbled 42% from last year’s level and home prices were off 14% from a year ago. None of that news sounds good, but the fact that stocks rallied through that data highlights the power of expectations. Only the consumer confidence figure was significantly below expectations and it just didn’t seem to be enough of a surprise to divert trader attention away from the energy market. The home sales report actually came in above the forecast, which spurred a rise in homebuilder shares.
In addition to homebuilders, other sectors on the rise Tuesday included IT consulting, airlines, education services, semiconductor equipment and home furnishings. Sectors out of favor today were led by agriculture products, auto manufacturers, gold and fertilizer shares.
Individual small-caps of note included Fuqi International (Nasdaq:FUQI), which jumped 17% to multi-month highs. The stock has been on a roll of late, up 77% from the April lows. Protection One Inc. (Nasdaq:PONE was up about 15% without fresh news. IXYS Corp. (Nasdaq:IXYS) climbed nearly 12% on unusually brisk volume, extending the rally off last week’s earnings boost. On the downside, AmCOMP Inc. (Nasdaq:AMCP) dipped 6% on heavy turnover without news.
Looking ahead to Wednesday’s action, the market faces durable goods data before the opening, then a Fed speaker after midday. Neither event promises much in the way of volatility, which should leave the market free to focus once again on energy prices, perhaps some money flow trends and maybe the chart structure.
Speaking of charts, today’s rally in the Russell lifted small caps back above the 20-day moving average, which is a mildly positive signal. The dominant chart patterns on daily studies remain bearish, highlighted by the rejection of new move highs on May 19. The market was able to hold well clear of important support at 720.50, and that point remains the downside spot to watch if the market starts to falter Wednesday. On the upside, resistance is still lurking just overhead at 735, then at 744.
