Russell closes in the green
Small-cap stocks grinded out a higher session Wednesday, overcoming an upward reversal in crude oil and a cavalcade of losses in the financial sector as investors embraced a surprisingly stout durable goods report as a sign that the economic pastures were starting to green up ahead. The Russell 2000 (NYSE:IWM) gained 4.07, or 0.55%, to 738.46.
At first blush, the most dynamic news events today would appear to be a big hurdle for small caps to overcome. An overnight smile over another slide in crude oil prices turned into a midday frown as the market for “black gold” reversed course and charged back above $131 dollars barrel. With pump prices now north of $4 dollars a gallon in many parts of the United States, the lofty energy market threatens to pinch off discretionary consumer funds and crimp any economic recovery.
What’s more, the banking sector took it in the chin today, pulled down by mounting loan losses, capital raising efforts and analyst downgrades on investment banks. Marquee financial stocks under pressure today included American International Group (NYSE:AIG), which tumbled about 4%, KeyCorp (NYSE:KEY), which shed about 11% and Lehman Bros. (NYSE:LEH), which dropped about 1%. Regional banks were plowed under by the credit crunch issue, with Fifth Third Bancorp. (Nasdaq:FITB) off some 3.5% and Comerica Inc. (NYSE:CMA) down more than 4% as well. When looking at a rundown of the big percentage losers today, the list was littered with various banks, large and small alike.
The biggest sector losers accompanying regional banks included multi-line insurance firms, specialized finance stocks, diversified banks and brewers. On the upside, buyers were attracted to fertilizer shares, apparel companies, steel stocks, forest products and casinos.
Among individual small caps, Daktronics Inc. (Nasdaq:DAKT) gapped higher this morning and gained some 14% on unusually brisk volume, spurred on by positive earnings news. Also, Gevity HR (Nasdaq:GVHR) rallied about 12%, with the only apparent fresh news tied to a dividend announcement.
So, now that we’ve covered all the bad news, what exactly was behind the rally today in small caps? Investors appeared willing to look past the recurring credit crunch theme that took a toll on financial stocks in order to focus a perception that the economy is on the mend and that business spending would be a boon for large equipment manufacturers and other companies. There is an old saying in the market that “it’s always darkest before the dawn,” and investors seemed willing to bet on the recovery story today instead of cowering to the crude oil reversal.
Despite the bounce in crude oil, the dollar was able to pound out gains against both the euro and the yen, which suggests that investment flow favored U.S. equities and that the old short dollar/long crude trade wasn’t overpowering the market — at least not today.
The durable goods report that came out this morning showed surprising strength, with the headline figure at minus 0.5%, which was above the forecast for a slide of 1%. The biggest stunner on the report was the ex-transportation figure, which came out plus 2.5%, well clear of the forecast for a meager gain of 0.5%. This report seldom carries a big trading influence on equities, and it’s something of a surprise that durables carries the tag of poster child for today’s resilient showing in the stock market. Although it’s easy to label the report as the fresh news behind the move, it’s just as possible that today’s advance in stocks was tied more to investment flows and repositioning of sideline cash.
In regard to the durables report, Northern Trust economist Asha Bangalore said in a research report titled “Beware of One-Offs” that the strength in orders of durables excluding transportation appears to be the result of higher commodity prices, a random sharp increase in one component, and the impact of exports.
From a charting standpoint, today’s rally represented just the third time the market has been able to carve out a close above opening levels since fresh move highs were rejected back on May 19. The Russell is back above the 20-day moving average and any new short sellers from last week’s pullback are likely to be feeling a little less confident after today’s rise. The market still faces solid resistance from 744 up to 750, and it may take some effort to chip away at the sellers in that range. Looking ahead to Thursday’s action, the market will find support on a dip to 731, then at 726 and 720.50. How the market closes out this week’s action could be critical to setting the chart structure going forward.
