Small caps close in the green
Small-cap stocks took flight Thursday, soaring to the highest daily close since Jan. 2, powered by a rally in the downtrodden financial sector and by money flow away from commodities and debt markets into stocks. The latter trends were likely boosted by a tumble in crude oil, which slipped below $127 dollars a barrel, and by a rally in the U.S. dollar, which climbed about 0.8% against both the euro and the yen. The Russell 2000 (NYSE:IWM) rose 7.09, or 0.96%, to 745.55, but did slip late off the highs when a test of key resistance near 750 attracted sellers.
Shortly after the regular market close, Dell Inc. (Nasdaq:DELL) reported earnings above the forecast, and the stock climbed about 5% on the immediate response in after-hours trading, which could provide a boost to stocks in general overnight if the buying interest remains in place.
Small-cap stocks assumed a leadership role on the rally Thursday compared with large-cap index products, and have in fact held up better recently even on down days — a possible sign that stocks are not as vulnerable at these levels as was feared.
“Small caps have been outpacing large caps on the open corporate debt market and firm credit conditions,” Nick Kalivas, vice president of financial research at MF Global told SmallCapInvestor.com in an email interview. “Risk-taking has picked up over the past two months given the dynamics in the corporate bond market.” He noted that the rest of the rise versus large caps is more index-related, tied to the underlying stocks in each product.
Kalivas also said that month-end window dressing had a role in the rally today in stocks, with pharmacy and financial shares attracting buyers while energy and commodity markets, which had been the hot zone, were pulled down by profit-taking. What’s more, Kalivas said that small caps have a timing tendency to rally at the turn of the month, and that appeared to be taking place once again.
The Commodity Futures Trading Association today announced a sweeping investigation into crude oil futures trading, and Kalivas said that news could be helping out stocks by enticing some players to exit the commodities arena and shift money into equities. “Asset allocation could be moving back to equities or the outlook for long-only commodity investments could be deteriorating. This could ease raw material inflation and help boost corporate profit margins,” Kalivas said. In addition, a sustained drop in crude oil would help bolster discretionary consumer spending, supporting a soft economy and lifting stocks outside of the energy arena.
Speaking of consumer spending habits, some of the rise in financial stocks was tied to a big jump in MasterCard (NYSE:MA) shares, which surged 8.3% and hit a record high when the company raised its profit outlook and forecast double digit revenue growth in 2008. Perhaps consumers aren’t completely shy about spending, even in the face of $4 pump prices and rising food expenditures?
In addition to MasterCard, large-cap financial shares that took a big leap Thursday included JP Morgan (NYSE:JPM), which was up 1.7%, and CountryWide Financial (NYSE:CFC), up about 8% on news that the Bank of America (NYSE:BAC) acquisition would take place. Within the small-cap sector, small banks and financial firms were readily visible on a list of big gainers for the day.
Despite the strong equity market performance today, Kalivas was cautious about the picture for Friday, saying “I think stocks face stiff resistance slightly above today’s highs, and I’m looking for sideways to lower action tomorrow. The Russell 2000 looks best, but we need to see a reset of the market catch-up to confirm the high.” He said that earnings from Dell, Marvell Technology (Nasdaq:MRVL), J. Crew Group (NYSE:JCG) and Tiffany & Co. (NYSE:TIF) will shape the direction of overnight trade.
Also on Friday, stocks will have to navigate another batch of economic data in the morning, first from the personal income report at 8:30 a.m. ET, then the Chicago Purchasing Manager’s Survey at 9:45 a.m. ET and finally the Michigan Sentiment Survey at 10:00 a.m. ET.
Lost in the luster of the surge in stocks today was a batch of morning economic reports that initially put equities on the defensive. The weekly claims report came in above the forecast and erased a tame overnight advance in stocks, while the GDP report hit the forecast on the nose but failed to generate any kind of upside surprise to excite the bulls. As it turns out, the economic reports were quickly dispatched as the dominant price makers for today’s action in favor of the slide in crude oil and jump in financial shares.
Individual small-caps of note today included Kosan Biosciences Inc. (Nasdaq:KOSN), which hurdled 229% on a gap move amid heavy volume on news that the firm will be acquired by Bristol-Myers Squibb for $235 million. Ultralife Batteries Inc. (Nasdaq:ULBI) climbed 26% on news that the company raised Q2 and 2008 guidance. Resource America Inc. (Nasdaq:REXI) rallied some 21% without any apparent fresh news. US Airways (CVE:LLC) was up over 7% on news that merger talks with United Airlines were ready to get underway. The stock managed to stay in the green even though rating agency Fitch downgraded the firm. On the downside, KMG Chemicals Inc. (Nasdaq:KMGB) shed about 16% after the firm changed its profit outlook.
