Small caps close higher
Small-cap stocks pushed higher Monday, buoyed by an improved tone in financial shares, a rise in tech stocks and a pullback in crude oil prices from record highs set early in the session. The Russell 2000 (NYSE:IWM) gained 7.12, or 0.97%, to 740.74.
“Financials are strong going into Goldman Sachs earnings tomorrow. Lehman Bros. (NYSE:LEH) also failed to ignite selling and there was a Washington Post story suggesting that the Fed would not tighten rates, which has helped financials,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview.
Kalivas said that investors appeared to be rotating out of some defensive names and into financial stocks. In addition, smaller oil companies and regional banks were helping to provide a lift to small caps relative to the big index products.
Small caps started out the day in the red, pressured by a sudden upside burst in crude oil prices, which charged to new record highs just shy of $140 dollars a barrel. The surge in energy prices was complemented by climbing metals prices and record high corn prices. However, a pullback in crude oil back toward $134 helped ease concerns about energy prices and refocused attention on a solid performance in financial issues.
The U.S. dollar slumped against the euro today, which played a role in supporting the energy market, as well as other commodities. The greenback was pressured by record inflation numbers in the eurozone, a weekend G8 meeting that did not spotlight a strong dollar stance and by talk that rate hikes in the United States have been premature. Goldman Sachs weekly Economics Analyst report said that while they could not rule out a rate hike given recent warnings by Federal Reserve Chairman Ben Bernanke and vice chairman Donald Kohn about inflation expectations that tightening at this stage is “inappropriate” and “unlikely any time soon.”
Goldman Sachs analysts said that “as these points become apparent, we think Fed officials will see things our way. We continue to believe that most FOMC members want to see three things before tightening — labor market improvement, clear signs of stability in the housing market and much more progress toward normalcy in financial markets.”
Speaking of Fed policy, Bernanke was on the speaking docket today, but his speech centered on health-care issues and he did not address the outlook for the U.S. economy.
Over the weekend, Washington Post columnist Robert Novak said that Bernanke does not intend to raise rates and that the Fed has leader has a bigger disagreement with European Central Bank officials than is apparent in his public statements, which clearly was on the minds of market watchers today.
In addition, some of the morning softness in stocks was linked to the NY Manufacturing Survey, which came in softer than the median forecast and which sparked a mild pullback in stock index futures ahead of the regular opening. Given the recovery move in stocks as the day wore on, the market may need to find a bullish data surprise Tuesday morning when PPI, housing starts, current account and industrial production numbers could set the tone.
Lehman Bros. has been the focal point of late in the financial arena, but the stock climbed 4% today after meeting earnings expectations and projecting forward guidance that investors were able to embrace. The goodwill on LEH spread to other financials, with Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) both up more than 2% ahead of earnings news later this week.
On the tech front, Research in Motion Ltd. (Nasdaq:RIMM) climbed 6% and was the top bullish influence on the tech-heavy Nasdaq index. Semiconductors were among the top-performing broad market sectors today, along with thrifts, mortgage finance firms, investment banking and brokerage stocks and various REITs. On the downside, investors shunned tire, rubber, soft drink, airline and health-care facilities shares.
Small caps of note Monday included Overstock.com Inc. (Nasdaq:OSTK), which jumped nearly 20% without any apparent fresh news to fuel the move. Landry’s Restaurants Inc. (NYSE:LNY) climbed 17% on unusually brisk volume on news that the company’s CEO will purchase the firm for $21 dollars a share, or about $1.3 billion. Ascent Solar Technologies Inc. (Nasdaq:ASTI) jumped some 17% to just less than $13 dollars a share, recovering steep recent declines that saw the stock sink from a high of $18.39 in mid-May down to a low of $10.10 last week.
Small caps bucking the index rally included ACADIA Pharmaceuticals (Nasdaq:ACAD), which collapsed some 43%, gapping lower on brisk volume on news that the firm’s schizophrenia drug failed a trial. Chiquita Brands International Inc. (NYSE:CQB) shed nearly 30%, also on heavy turnover as several U.S. food company stocks took a nosedive amid concerns about higher feed and fuel costs.
Looking ahead to Tuesday’s action, Kalivas said the market will likely take direction from earnings news generated by Best Buy (NYSE:BBY) and Goldman Sachs. In addition, “macro numbers are heavy Tuesday, and I tend to think the market will trade sideways to higher, assuming Best Buy and Goldman Sachs are not disasters.” He noted that there is some favorable technical momentum in play right now, but that the S&P 500 forward market needs to push back past 1385 and the Russell 2000 needs to move above 750 to re-establish the uptrend.
