Small caps climb with rate cut, commodity bounce
The Russell 2000 (NYSE:IWM) closed up nearly 2% on Wednesday, embracing signs of a thaw in credit markets, another rate cut by Federal Reserve officials, a bounce in commodity-tied stocks and another rise in global equity prices.
The Federal Open Market Committee elected to slash 50 basis points off the Fed funds target, which was right in line with market expectations. The immediate reaction from stocks was a mild slide off the highs, but the move was relatively tame, especially within the context of recent volatile swings. Small caps were able to hold in positive territory immediately after the rate cut, outperforming large caps in a switch from the trends we’ve seen in recent weeks.
The rate cut by the Fed coincides with global easing; just last night, central bank officials in China cut rates by 0.27% and European leaders hinted that further rate cuts could be right around the corner. Even in Japan, where low rates have persisted forever, central bankers are expected to cut rates.
That environment of cheaper money is seen as supportive to businesses and helped spark a rally in overseas equities. Japan shares were higher for the second consecutive session, trying to bounce after hitting 26-year lows on Monday.
It’s possible that the bulls were corralled a little bit today, leery to take a big bullish stand ahead of Thursday’s GDP report, which is widely expected to show the nation’s economy slipping into negative territory, consistent with a recession.
Also on the data front, earlier today the durable goods report came in at plus 0.8%, which was better than the forecast for a decline of 1.1%. Durable goods orders tend to be volatile, so the market wasn’t that eager to make too big a deal of the surprising strength. In addition, before the market opened, the MBA Mortgage Application Index jumped 16.8%, recovering nicely after hitting eight-year lows last week. Still, the index remains mired nearly multi-year lows and is down 30% from year-ago levels. Although there are spotty signs of stabilization in the housing market, the trends are still quite weak.
Commodities were a key part of the story today, which may explain some of the relative strength in small caps, which have shown a tendency to more closely track commodity trends in recent weeks. Crude oil prices jumped some 9%, or more than $5 a barrel, bolstered by oversold conditions and a slide in the U.S. dollar, which tumbled some 1.4% against the euro. Elsewhere in commodities, big rallies were seen in grains, softs (i.e. markets such as coffee, sugar, cocoa) and in copper. The latter soared some 14%, which is particularly interesting because copper is often seen as a proxy for economic activity around the globe. Copper has collapsed in recent weeks, but a stabilization in that market would be a positive sign for the global economy.
Today’s rally was a nice show of validation for the bullish outside reversal on daily charts notched Tuesday. That formation stands as the best sign of a potential bottom we’ve seen on daily charts, but still needs further upside action through Friday to generate bullish signs on weekly charts. It also was nice to see the back-to-back gains in the Russell Wednesday, which has been quite rare. When is the last time we saw three consecutive green candles on daily candlestick charts? It hasn’t happened since Sep. 12, and there is an old saying among traders that “three times makes a trend.” From a support/resistance standpoint, the “figure” at 500 remains a key upside hurdle. From there, look for resistance around 514.50, then minor resistance back toward 546. If the market struggles Thursday after GDP, the downside points to watch are at 474 and 450.
Individual small caps on the move shortly after the open included SAVVIS Inc. (Nasdaq:SVVS) jumped 50% as the IT infrastructure services provider reported a 15% rise in revenue and a net loss of $0.01 a share. Another small cap getting a nice earnings-related lift was Hercules Offshore Inc. (Nasdaq:HERO), which jumped 34%. The rally in metals markets provided a boost for Silver Standard Resources Inc. (Nasdaq:SSRI), which rallied 29%.
