Small caps find green pastures on tech frenzy
Small caps edged higher Friday, underpinned on buying in the tech sector, benign economic data and by traders eager to put money back into stocks after a solid showing this week. Buying interest was curbed however, from those willing to book month-end profits and by lingering concerns about lofty energy and commodity prices. The Russell 2000 (NYSE:IWM) finished out the day up 2.73, or 0.37%, at 748.28.
For the month of May, the Russell rose 4.5%, climbing to the highest monthly close since December. Small caps trounced many of the large-cap index products this month. The Dow was actually down 1.4% in May, while the S&P 500 was up 1%.
The star performers today came from the tech arena, buoyed by impressive earnings from bellwether stock Dell Inc. (Nasdaq:DELL) and by chip designer Marvell Technology Group (Nasdaq:MRVL). The two stocks jumped 6.8% and 23.5%, respectively. The rise in tech stocks today bolstered investor psychology about consumer spending issues amid a difficult economy. Other big-name tech firms attracting buyers today included Cisco (Nasdaq:CSCO) and Hewlett-Packard (NYSE:HPQ). The Philadelphia Stock Exchange’s key index on semiconductor shares (CVE:SOX) jumped 2.3%.
Although tech generated much of the power for today’s move (the Nasdaq was up 0.6%, while the Dow was down 0.06% and the S&P 500 up 0.15%), the insurance business got a lift from American Insurance Group (NYSE:AIG), which gained 2.3% on an upgrade from analysts at Morgan Stanley.
Retailer and beverage shares weren’t joining the buying party however, with Costco (Nasdaq:COST) down 2.4%, Target (NYSE:TGT) down 0.4% and Pepsi (NYSE:PEP) off 0.5%. The S&P Retail Index was off about 0.5% for the day.
The market managed to dodge any potential data pitfalls today, as economic reports on income, inflation, manufacturing purchases and consumer sentiment all basically came in benign. Perhaps the biggest relief was on the inflation front, as today’s personal income report showed that the PCE deflator — considered the Federal Reserve’s preferred inflation gauge — edged down last month, suggesting that price pressures aren’t out of control at this stage.
Investors continued their daily fretting over volatile crude oil gyrations, which dipped, then rose again, taking some of the bite out the bullish psychology in equities. There is a hope among some traders that a massive long energy/short dollar trade will start to unwind, and that the money from those trades will be plowed into the stock market. There is a chance that concept has been overhyped, but it will be fascinating to watch if it does unfold.
Recent gains in the stock market were supposedly tied to a cooling of energy price escalation as crude oil prices retreated from record highs and ideas that other commodity market inflation was tipping down. However, the truth is that the Commodity Research Bureau Index posted the highest monthly close in history today and has been storming upward since August 2007. Clearly, higher commodity values pinch corporate margins and threaten consumer purchasing power, but so far stocks and commodities have shown a surprising ability to trend together, although some sectors (such as airlines) have been brutalized by soaring energy values.
Looking at sector action today, IT consulting, refining and marketing, construction and coal shares were the top performers. Meanwhile, sellers were attracted to forest products, regional banks, apparel and accessories and industrial REITS. If you’re wondering which areas fared best and worst during May, here’s the answer: the top performing sectors for May were electrical equipment manufacturers, coal, construction, aluminum, home furnishings and brewers. Meanwhile, the biggest losers were automobile manufacturers, photo products, insurance, homebuilding, banks, brokerages and investment banks.
As for individual small caps today, The Aristotle Corp. (Nasdaq:ARTL), jumped some 24% without any apparent fresh news to power the move. Wind River Systems (Nasdaq:WIND) climbed about 19%, gapping higher on the opening and never looking back after beating the earnings projection. On the downside, US Airways (NYSE:LCC) tumbled nearly 7% on news that the firm would not seek a merger with United Airlines.
Looking at the chart picture, the market still faces daunting resistance at the 750 zone after a failed attempt to conquer that plateau this week. That area represents a 50% retracement target of the entire bear market collapse and probably won’t be overtaken without a tussle.
Next week serves up an intense smorgasbord of economic data, topped off by Friday morning’s monthly employment report. The volatility could ramp up right off the bat Monday with the release of the ISM Manufacturing Survey. How the market trades through the next large batch of economic news could be key.
