Russell rallies on improved profit picture, crude slide
Small-cap stocks generated another solid rally Thursday, boosted by decent earnings from key bellwether stocks and a downward spiral in crude oil prices. The Russell 2000 (NYSE:IWM) closed up 9.88, or 1.44%, at 696.63.
For the second consecutive session, investors were willing to dip their toes back into what had been chilly water surrounding the financial arena. The Financial Select Sector SPDR Fund rose 5.3% and pushed through the 20-day moving average for the first time since mid-May. Within the financial sphere, JP Morgan (NYSE:JPM) was the big catalyst for the bulls today, jumping 10% after reporting solid quarterly earnings that topped the forecast. Once again, embattled government-sponsored mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) produced a stout rally, which calmed investor fears about the banking system and lent a supportive tone as well.
Crude oil prices tanked again today, crumbling some $5 dollars a barrel to slip through $130 dollars as options expirations heightened a selling mentality that was already in play amid concerns about softer demand from the higher price structure. Lower energy costs would be a welcome sign not only to consumers already pinched from higher food and gasoline prices, but also from many businesses that have seen margins sliced away by higher input fuel costs. Elsewhere on the commodities inflation front, soybeans, corn, wheat, sugar and cocoa all were sharply lower, and the iPath GSCI Total Return commodities index tumbled 3.0%.
While JP Morgan’s strong results appeared to be a driving force behind today’s stock market rally, there was a raft of big name companies that had surprisingly stout quarterly earnings on display. For example, United Technologies Corp. (NYSE:UTX), the world’s largest maker of elevators and air conditioners, climbed a cool 5.8% after beating the Street’s forecast. Within the capital-goods industry, UTX wasn’t just a one-trick pony, either. Danaher Corp. (NYSE:DHR) and Illinois Tool Works (NYSE:ITW) both topped the estimate and were up 6.1% and 0.9%, respectively. If key companies on the financial and manufacturing side of things can post decent results in a difficult economy, then maybe the profit picture isn’t as bad as feared following three months of sinking stock market prices.
Stock market investors also were able to shrug off economic news for the third consecutive session. Even though the headline figure for the housing starts report showed a stunning 9.1% increase, it was all produced through smoke and mirrors as a data quirk for New York City offset what would have been a 4% slide. And while the weekly claims figure at 366,000 was better than feared, the jobs picture still isn’t exactly upbeat. Add that to sobering news on the inflation front earlier this week, and you have a stock market that is willing to focus on earnings and run with good news instead of fret about lagging economic indicators. Of course, it’s easier to see the rose over the thorn when crude oil prices are in the midst of a sudden $17-dollar slide off record highs.
One aspect of the market that has clearly become rosier is the chart structure in small caps. The Russell soundly rejected Tuesday’s freefall to fresh move lows, and formed a bullish pattern on daily charts in the process. If the market can continue to work higher through Friday, then it will also create a bullish scenario on weekly charts, which carries even more cache. Looking ahead to Friday’s action, key support will be at 690, then at 684 and 679. On the upside, resistance is at 701, 707.50 and then a vacuum up to 717.50. There are no major economic reports or Federal Reserve speeches to navigate through Friday, which means the market will be free to focus on earnings results while watching to see if the crude oil slide can hold up into the weekend.
Broad market sectors on the rise Thursday included thrifts and mortgage finance firms, regional banks, diverse financial services, container stocks, hotels, motorcycle manufacturers, investment banking and brokerage companies and specialty stores. The weak performers were dominated by commodity themes, with coal, steel, oil exploration, aluminum, oil transportation and gold stocks all on the decline.
As for individual small-cap stocks, Catalyst Semiconductor (Nasdaq:CATS) soared 58% on news that the firm would be purchased for about $115 million by ON Semiconductor Corp. (Nasdaq:ONNN). Gencor Industries (Nasdaq:GENC) rallied 27%, jumping through the 20-day moving average for the first time in two months. GENC shares have collapsed from nearly $33 in early May to a low last week below $9. MGIC Investment Corp. (NYSE:MTG) rallied 35% as the mortgage insurer said they expect to return to profitability despite posting a quarterly loss today. On the downside, SemGroup Energy Partners LP (Nasdaq:SGLP) tumbled 51% on unusually brisk volume, sinking to 52-week lows in the process. TeleTech Holdings Inc. (Nasdaq:TTEC) sank 25% as the company lowered annual revenue projections.
