Second rally day a charm for small caps
Small-cap stocks shot higher Monday, adding to the big rise from Friday afternoon as the market found relief in a big rescue plan for the nation’s No. 2 bank and continued to express enthusiasm for economic staff appointments by President-elect Obama. The Russell 2000 (NYSE:IWM) closed up 30.24, or 7.44%, at 436.78, generating the largest two-day surge since the short-lived Oct. 10 bottom. For the year, the Russell is down 43%, while the Dow is off 36% and the S&P 500 is down 42%.
The day got off to a rocking start on news that the government would guarantee some $306 billion in toxic assets from Citigroup Inc. (NYSE:C). The nation’s No. 2 bank had been in collapse mode in recent days, sparking fear that the bank could fail or be forced to sell off assets, which in turn could trigger systemic risk in the financial landscape. In addition to the asset guarantee, the government announced a direct $20 billion injection into Citigroup, all of which was good news for shareholders, as Citigroup’s stock jumped some 51% today. The PHLX KBW Banking Index surged 16%.
Energy and commodity names were a big part of the rally today, as beaten down stocks in those arenas benefited from both the stock market rally and by a sharp decline in the U.S. dollar against the euro. Crude oil prices caught fire today, climbing $4.57 a barrel, or 9.1%, providing a boost to energy companies in the process. The Financial Select Sector SPDR Fund rose 8.4%.
Another downtrodden area that caught investor enthusiasm today was the retail universe, fitting as we head toward the big “Black Friday” kick off of the official holiday shopping season. The S&P Retail Index jumped 10% and several small-cap retailers benefited from a wave of bargain hunting on that front.
President-elect Obama served up his second major press conference today since he won the vote in early November. The market rallied hard late Friday when news of some of his top picks for economic advisor positions started to leak out. The big news of course was that Obama had tabbed New York Federal Reserve President Timothy Geithner as Treasury Secretary, and today Obama ran down the rest of the economic team in a noon press conference.
Market watchers say that the Obama appointments have been a bullish influence on stocks for two reasons: number one, his picks appear to be solid people with a background to tackle a very difficult situation; number two, the fact that Obama made these economic appointments this quickly as his first order of business showed market watchers that the economy is indeed a priority for the President-elect. The market was also hoping that Obama might tip his hand about the size of a stimulus plan that he unveiled pieces of in a weekend radio address. However, Obama refused to put a dollar figure on his stimulus plans yet, which triggered a brief pullback in the stock market at midday, but which had limited shelf life.
Individual small caps of note today included lots of small banks and financial firms and a bevy of commodity companies as well. One of those firms, James River Coal Co. (Nasdaq:JRCC) soared 32% as investors tried to find bargains in commodity shares. JRCC was trading above $43 a share back in late August, now it’s below $8. Williams-Sonoma Inc. (NYSE:WSM) surged 36% as the operator of retail store Pottery Barn rallied hard off fresh 52-week lows set Friday. Stoneridge Inc. (NYSE:SRI) shot up 64% as the vehicle electrical component maker bounced off last week’s lows.
Looking at the chart picture, the rally today was a nice short-term validation of the move Friday, but it will take a powerful rise this week to generate anything convincing on longer-term charts; after all, the market has now seen four bullish reversals on daily charts off bear market lows and none of the previous three worked for long. Still, the short-term picture has clearly improved greatly, and the next key upside point to watch is 442, which corresponds with the Oct. 28 low.
Completely lost in the glow of today’s Citigroup and Obama news was the housing starts report, which was predictably awful as prices generated the worst percentage decline in 40 years. Still, the rate of sales was near market expectations, which allowed investors to shrug off the news. Looking at Tuesday’s session, the market will get a chance to respond to the latest GDP data right off the bat; it’s expected to be awful, setting the stage for the market to either pause from the recent bounce on bad news, or continue to cruise higher on the hope that all the bad economic news is already priced into things.
