Russell at eight-month high on firm dollar, soft crude
Small-cap stocks pushed higher in morning trade, carried on the wings of a renewed rally in the U.S. dollar and a slide in global commodities — particularly crude oil. At 9:59 a.m. ET, the Russell 2000 (NYSE:IWM) was up 5.24, or 0.69%, at 759.62; the morning peak in the Russell marked the highest intraday price since Jan. 2.
Small-cap stocks are on the verge of posting the highest weekly close of 2008, a remarkable achievement considering the Dow and S&P 500 are still suffering losses in the 11% range so far this year. Any close today above 747.38 would do the trick. If the Russell were to really catch fire today and push above 766.03, then small caps would actually be in positive territory for the year. The reason it takes a big leap from current yearly high weekly closing levels to positive territory is because the market got hammered the very first trading day of the year and also fell hard when staking the June peak.
Back to the big news today — the U.S. dollar stormed to fresh move highs overnight against both the euro and the Japanese yen, climbing about 0.6% versus both currency markets. The strong upside push in the greenback clearly had a bearish impact on commodities, most notably the crude oil market. Crude oil tumbled some $2 dollars a barrel back below $113 and was hovering just above three-month lows early this morning. The story in commodities wasn’t just an energy tale, however; palladium was down 5% this morning, cocoa was off 2.5%, sugar was down 2.2%, copper tumbled 2.7% in London trading and aluminum prices hit a six-month low. The recent collapse in commodities markets (the Commodity Research Bureau Index has tumbled 17% from the July high) has provided some relief on the inflation front and bolstered investor psychology that consumer spending won’t be crushed by higher gasoline and food prices.
In addition to the dollar/commodities theme, the market also got some bright news this morning on the manufacturing front. The NY Manufacturing Survey came out at plus 2.77, which was much stronger than the forecast for minus 4.4, and marked the first positive reading since April. This survey is for August and marks one of the earliest manufacturing reports of the month, setting a positive tone going forward. When the NY report came out ahead of the opening, stock index futures and the dollar posted a minor extension of overnight gains.
The industrial production report also topped the forecast, coming in at plus 0.2%, vs. the projection for 0.0%. Production benefited from the best output in 10 months. The market didn’t have much of a response to the number, but seldom does on this particular data series. Also, the University of Michigan consumer sentiment survey came in at 61.7%, which was slightly below the forecast for 62%, but which had little immediate reaction in stocks.
A couple of famous investors were buying up stakes in large firms this morning, which is interesting and perhaps bolsters psychology in the overall stock market. Billionaire investor George Soros raised his stake in embattled brokerage firm Lehman Brothers Holdings Inc. (NYSE:LEH) to 9.5 million shares from 10,000 shares and the “Oracle of Omaha” Warren Buffet has amassed a stake of 3.24 million shares in NRG Energy Inc. (NYSE:NRG). LEH was up 6.1% shortly after the open, while NRG was up 4.7%.
Broad market sectors on the rise this morning include construction materials, building products, homebuilders, department stores, regional banks, thrifts and mortgage finance firms, forest products and consumer finance stocks, which reflects a nice diversity in the overall market early on today.
Individual small caps making noise include Oplink Communications Inc. (Nasdaq:OPLK), which gapped higher and gained about 10% on solid earnings. Also, Deltek Inc. (Nasdaq:PROJ) was up 10% and remains in a recovery mode after slipping to move lows in early July. PROJ shares are still well off the December highs above $18 dollars a share, trading this morning just south of $9. Champion Enterprises Inc. (NYSE:CHB) jumped some 20% and is another small stock trying to mount a comeback from move lows set in July. On the downside, Edge Petroleum Corp. (Nasdaq:EPEX) was off 9%.
As today’s trading progresses, it will be interesting to see if the recent highs near 757 can be cracked with authority (which seems likely given the morning push through that area). There is some risk here of building a significant resistance zone there if small caps retreat in the afternoon. Above 757, the June peak near 763 is the next key upside zone to watch. If small caps can sustain the climb through that point, then there is token resistance at 769, but the major point is at 775, which represents a 61.8% Fibonacci retracement target of the entire bear market collapse. On the downside today, if small caps start to wobble, look for support at 750, 742 and 734.
