Sharp rise on crude freefall, Bernanke remarks
Small-cap stocks pushed higher Tuesday, bolstered by a sharp pullback in crude oil prices that allowed a little breathing room toward inflation fears and the consumer spending picture. In addition, Federal Reserve Chairman Ben Bernanke said that the central bank could extend the emergency lending window to strapped financial institutions, which took a little heat off the credit crunch — at least momentarily. The Russell 2000 (NYSE:IWM), gained 24.46, or 3.72%, to 682.72, generating the largest one-day gain since March 18 and the third largest one-day percentage rally of the year.
Small-cap stocks were noticeably stronger than their large-cap brethren, which were dragged down by significant losses on key oil stocks such as Exxon Mobil (NYSE:XOM), which was down 0.7% heading toward the close, Chevron (NYSE:CVX), off 1% and oil services stock Schlumberger Ltd. (NYSE:SLB), which shed 3.7%.
Before the stock market open earlier today, Bernanke’s comments erased solid overnight losses in stock index futures, and helped alleviate mounting worldwide concern about the health of the banking system. Before the Bernanke rescue, European shares were sinking, paced by a slide to five-year lows in bank stocks, and elsewhere around the world global stock index products slipped into bear market territory.
Even though the tone improved with today’s recovery in equities, the market is still clearly in a tenuous position fretting about high energy costs amid sluggish growth and rising unemployment.
“The Fed has said downside risks are diminishing … but we wonder if it is still correct to think that downside risks to the economy have subsided,” Christopher Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ, said in an email. Rupkey noted that recent employment data has been consistent with a recession, even if real GDP growth has note turned negative yet. “We would not dismiss the idea that the Fed might need to come in and cut rates again before this cycle is over,” he said.
Rupkey also noted that last week’s initial claims number at 404,000 might have been just as big a news event as the monthly employment release, which heightens focus on that number when it comes out Thursday morning. Speaking of economic chum, this morning’s pending home sales release plunged 4.7%, which was above expectations and which appeared to spark a brief sell-off in the morning.
It was a welcome sight for the bruised bulls to see a negative correlation between equities and crude oil back in play today after the stock market failed to gain traction Monday despite a steep decline in energy prices. Crude oil followed up Monday’s steep decline with another big slide today, and is now down nearly $10 dollars a barrel so far this week. The fact that Hurricane Bertha is not expected to sweep through any major production areas in the Gulf helped pull the rug out from the oil market, but ongoing tension in the Middle East between Iran and Israel, and a tight supply outlook could put a floor under the sudden downward spiral.
The big push lower in crude oil prices was accompanied by a push upward in the U.S. dollar, which gained about 0.4% against the euro and about 0.2% versus the yen. Elsewhere on the commodity front, aluminum took a dive in Europe, copper tumbled in New York and grains in Chicago were on a fast retreat amid a better weather forecast after corn set record highs recently spurred by flooding in the Midwest.
Broad market sectors on the rise today were highlighted by regional banks, automobile manufacturers, airlines, thrifts, tires and rubber and diversified banks. For the most part, those sectors were all getting crucified during the second quarter slide off the spring highs. On the downside, specialty stores, metals and mining, steel, coal, aluminum and various oil groups were attracting sellers.
Small caps of note included PriceSmart Inc. (Nasdaq:PSMT), which jumped some 24% as the firm saw quarterly profits double. It was timely good news for the company, which tumbled to 52-week lows last week and was off 40% from the May 2008 peak. CEVA Inc. (Nasdaq:CEVA) rallied 15% as the company was named to the Russell 2000. AbitibiBowater Inc. (NYSE:ABH) surged 21%, also on the mend after slipping to new lows Monday. Bucking the overall rally, InterDigital Inc. (Nasdaq:IDCC) was off 23% after the firm appeared to lose a patent infringement suit. ACCO Brands Corp. (NYSE:ABD), was off about 9%, tumbling to fresh 52-week lows.
From a chart perspective, if the Russell can mount a run back above 683 or higher on Wednesday, then it would add some credibility to today’s rise. The old key support line at 690 is once again coming into view on the upside and could be an interesting test for the recovery move this week. It will be crucial for the Russell to hold above 650 support on any pullbacks from here, or else a hard test of the March lows at 643.35 is likely. A breach of that point would open the door for yet another leg down in the bear market trend. For now, it should be noted that the market was extremely oversold and ripe for a correction. If we’re going to see a major bottom forming here, then we’ll want to see more of these dramatic one-day percentage moves, which coincided with the bottoms formed in January and March.
