Russell rises on stimulus hope; oversold momentum
Small-cap stocks pushed higher Tuesday, as investors tried to balance ongoing worries about the economy and corporate profits versus hope for fresh stimulus funds. Short-term oversold conditions likely played a supportive role as well. The Russell 2000 (NYSE:IWM) closed up 4.99, or 1.06%, at 473.79 and is now down 5.1% for the year, while the Dow is off 3.7% and the S&P 500 is down 3.4%.
As the market lurches forward into the earnings season, the picture remains gloomy with Alcoa Inc. (NYSE:AA) kicking off the proceedings Monday after with a larger-than-expected loss and big-cap bellwether General Electric Co. (NYSE:GE) taking a hefty 5.6% hit today amid negative analyst comments. In general, no one is expecting earnings to be a positive story, but if things veer too far south of an already dour forecast, it could generate enough worries to send the market back toward a retest of the lows. All that said, in some ways it’s actually a positive to see the overall market holding up reasonably well today given the slide in GE shares.
Despite the seeming preponderance of negative input again today, small caps held in well throughout the session, perhaps hinting that some investors are willing to take a shot at riskier fare given the recent pullback off the highs. In addition, energy and commodity stocks often have a powerful directional bias on small caps and those sectors were on better footing today.
Crude oil prices closed out the day with a modest gain of $0.19 a barrel, which was off the U.S. trading session highs, but still quite a bit better than losses seen in overseas action. U.S. crude finished up 0.5% at $37.78, underpinned by talk from Saudi officials that they had cut production beyond the scope of previous announcements and by a brutal cold front pushing into the northern Midwest that could spike up heating oil usage. Gains in energy and other commodities markets were likely hampered somewhat today by a strong tone in the U.S. dollar, which rose 1.4% against the euro.
Federal Reserve Chairman Ben Bernanke made his first speaking appearance of the New Year in London. Although the chief monetary policy leader cautioned that the financial market stress has spilled over into the global economy and that the timing of any recovery is uncertain, he also said that bail-out funds should be targeted at mopping up toxic debt, which was a welcome sign for investors after watching the first half of TARP rescue funds get diverted away from that purpose.
Speaking of TARP funding, some enthusiasm today was likely tied to hope that the next $350 billion of government spending will be released soon after President-elect Obama asked President Bush to request a release of the remaining funds. Congress now has 15 days to groan and posture and make a fuss before letting the funds flow. There is talk that Obama faces some political struggles on getting these funds out, but if the market truly thought it wouldn’t happen, then today’s action in the stock market would have likely been a big downside rout.
Today’s international trade data might have found some solace for investors as the massive deficit narrowed dramatically. However, the trade report reflects November data, and even if a narrower deficit helps the final GDP reading, it’s not like it means unemployment stops rising or the recession suddenly ends. In addition, the deficit narrowed in no small part because of a record 12% drop in imports, not because American companies sold a bunch of extra widgets to the rest of the world.
Individual small caps on the move today included Aercap Holdings NV (NYSE:AER), which soared 25% as the Netherlands aviation firm announced various deals for fourth-quarter aircraft purchases and sales. Symmetry Medical Inc. (NYSE:SMA) rose 16% after sinking to the lowest daily close in more than a year on Monday. On the downside, Prestige Brands Holdings Inc. (NYSE:PBH) gapped lower and shed some 18% as the personal-care products manufacturer issued guidance updates.
Looking ahead to Wednesday’s action, the market will see a ramp up of economic data, with retail sales, import prices and business inventories coming out in the morning, ahead of inflation data on Thursday and Friday. From a charting perspective, the market basically finished off a little rounded top formation and found support above a logical zone running from 464 down to 461. A breach of 461 this week would be troubling because it would signal a new pattern formation and because there is very little convincing support until closer to 450. On the upside, resistance is at 481 and the big point is back up at 491.
