Small caps build on FOMC rally; large caps stall
Small-cap stocks rejected a morning pullback to close higher on the day, backing up the euphoric FOMC rate cut rally with an impressive showing given early weakness. Tuesday’s FOMC rise was powered by financial and homebuilder stocks, while today’s climb branched out to retailer, selected commodity and telecom names. The Russell 2000 (NYSE:IWM) closed up 3.75, or 0.78%, at 486.59 and is now down 36% for 2008. Meanwhile, the Dow was down 1.12% on the day, and is down 33% for the year, while the S&P 500 was down 0.96% Wednesday and down 38% for 2008.
Action today was noticeably calm after the big rate cut rally Tuesday. Investors were likely pondering just how the Federal Reserve would bolster the economy now that interest rates for short-term loans from the government are basically at zero. One clear path would seem to be buying longer-dated instruments, and Treasury markets were higher throughout the day, although down quite a bit from the morning rise when equities were on thinner ice to start the session.
On the retailer front, Macy’s Inc. (NYSE:M) jumped some 18%, leading the S&P Retail Index to a decent 1.8% gain on the day. Small-cap firms such as Abercrombie & Fitch Co. (NYSE:ANF) rose 3.9%. Retail sales reports have been spotty through this difficult holiday season, but Best Buy Co. Inc. (NYSE:BBY) shot higher Tuesday ahead of the FOMC news on a solid earnings report.
Selected commodity areas provided support to the stock market today, with metals, mining, gold and steel companies counted among the top performing sectors. Some of the bullish edge may have been taken off commodities however as crude oil prices plunged this afternoon, sinking some 8% to the lowest level in more than four years. The sell-off in crude took place right in the face of an announced production cut by OPEC leaders. Perhaps the sting of OPEC’s proposed cut was limited by the fact that non-members Russia and Mexico did not weigh in to support a pullback in production. Interestingly, even though crude oil prices slumped to four-year lows, energy stocks were actually slightly lower on the day.
Financials were a drag on stocks much of the day, but trimmed losses when analysts seemingly had an upbeat take on Morgan Stanley (NYSE:MS) despite the firm posting a larger-than-expected loss for the quarter. MS shares rose 2.2% for the day, but the Financial Select Sector SPDR Fund was off 0.9%.
Small-cap stocks on the rise today included Harry Winston Diamond Corp. (NYSE:HWD), which rallied 20% as the firm has both retail and mining assets in play on a day when retail and mining stocks were solid performers. Speaking of shopping, Macerich Co. (NYSE:MAC), which is one of the largest regional shopping market operators, jumped 20% as well. Cadence Pharmaceuticals Inc. (Nasdaq:CADX) jumped 32%, gapping higher and rising on unusually heavy volume (a busy day in CADX is usually 300,000 — today it traded more than 3.5 million) as the firm announced positive results for a post-surgery pain treatment drug. And we should probably mention that Tuesday’s big downside mover – Satyam Computer Services Ltd. (NYSE:SAY) jumped some 42% today when the firm’s chief executive decided not to go ahead with plans to dump $1.6 billion to purchase his son’s infrastructure firms. Investors revolted on that news Tuesday, sending SAY down 55%, but warmed to his reversal decision today. Coleman Cable Inc. (Nasdaq:CCIX) climbed 31% without any apparent fresh news behind the impressive rally.
The chart picture for small caps continues to show promise; even a small down day in the shadow of Tuesday’s big FOMC rally (like the Dow) would not have dented the upbeat picture. The push above the 50-day moving average for the first time since the collapse began back in September is a noteworthy accomplishment and could attract system-type of investors if the move holds up. The next big upside target to watch is at 491. Although that point was breached on an intraday basis today, a solid close above that line would snap the long-running bearish behavior pattern of setting lower lows and lower highs.
Looking ahead to Thursday’s session, weekly claims come out ahead of the market opening and remain a focal point as the market tries to carve out a bottom against the backdrop of rising unemployment. In addition to claims, the Philly Fed survey and leading indicators also come out and could throw some volatility into the morning data mix.
