Small caps hurdle low confidence reading
Small-cap stocks pushed higher Tuesday, shrugging off record low consumer confidence as investors scavenged for bargains on beaten down bank and financial shares, hoping that President Obama’s pick to lead the Treasury will make quick moves to bolster bank balance sheets and mop up toxic assets. The Russell 2000 (NYSE:IWM) closed higher for the third consecutive session, gaining 5.53, or 1.23%, to 455.58. The Russell is still down 8.8% for the year, while the Dow is off 6.8% and the S&P 500 is down 6.3%.
Timothy Geithner – Obama’s nominee to head the Treasury Department – was finally confirmed by lawmakers late Monday and investors are hoping he will move rapidly to utilize government funds to help out banks. Obama himself even said today that the government will need to step up to help out banks with troubled assets, which was the original purpose of the TARP bailout plan before getting sidetracked during the waning days of the Bush Administration. The prospect of a “bad bank” set up to absorb troubled assets was back in play today, with Senate Banking Committee Chairman Chris Dodd saying the idea made “some sense.”
For the day, bank stocks were up 3.3%, while financial shares gained 3.5%. But the upside progress wasn’t necessarily spread all around as retail stocks, airlines and some commodity groups struggled. The S&P Retail Index dipped 1.3%, with home-related retailers struggling. The AMEX Airline Index tumbled 6.9%, with Delta Air Lines Inc. (NYSE:DAL), the world’s largest carrier, going into a 20% tailspin after releasing crummy earnings.
Gold stocks also took a nosedive today, and commodities in general were struggling, even though the U.S. dollar was pretty much flat against the euro and yen. The Commodity Research Bureau Index fell some 3% on the day, powered by a big decline in crude oil prices. The market for “black gold” tumbled 9%, or $4.15 a barrel, to $41.58, pressured by worries about demand amid the recession and a rising tide of stockpiles. Despite the dramatic fall in crude oil prices, energy stocks basically held steady on the day, although some segments – such as refiners – took a hit.
As the market meanders through a dreadful earnings season, there were a few bright spots in the mix today on large caps, which was enough for investors to embrace. American Express Co. (NYSE:AXP) topped the forecast and jumped 9.7%; US Steel Corporation (NYSE:X) also posted solid results and climbed 6.9%. Even mixed reports from chemical giant DuPont and Co. (NYSE:DD) didn’t end up making a dent in DD shares, which were basically flat on the day.
On the economic data front, it was a little more difficult to sift through the wreckage and find a rose. As noted earlier, consumer confidence plunged to a record low reading of 37.7, which also was below the already gloomy forecast of 39.0. Consumers are rightfully fretting about their jobs as the unemployment rate continues to climb and companies keep announcing grim layoff numbers through earnings season. Early in the day, the confidence reading appeared to take a toll on stocks, but the market was able to set aside those issues in the afternoon. Also on the economic data front, the latest reading on home values was somber as the Case-Shiller Home Price Index notched a record slide of 18.2% from year-ago levels, which will only serve to further worry home owners and which takes some of the glow off Monday’s upside surprise on existing home sales. On Thursday, the market will get another peek at the housing picture, in the form of new home sales. Although Wednesday gives a reprieve from the depressing economic indicators, the 2:15 p.m. FOMC statement could stir up a little afternoon volatility. With interest rates basically at zero, you might wonder how the Fed could say much to trigger a market move, but monetary policy leaders have hinted before that they could get “creative” in attacking rates outside of the Fed funds window.
Speaking of interest rate themes, today’s two-year note auction went well, which likely provided a breath of relief from the market – after all, the government needs money to fund all these rescue plans and the upcoming Obama stimulus package. You might wonder “why wouldn’t the debt auction go well?” Well, for one thing it constituted a record $40 billion in notes, so the supply hurdle had to be gobbled up; for another thing, there was some concern that Giethner’s remarks about China manipulating their currency might turn off our best debt customer. China makes our widgets; we sell them our debt to finance our massive government spending projects. Since the auction went well today, the initial read is that China (and other customers) are still warm and fuzzy about owning our paper, even at historically low rates of return.
Individual small caps making a move today were highlighted by CV Therapeutics Inc. (Nasdaq:CVTX), which jumped 36% on news of a $1 billion takeover of the biotech firm by a Japanese player. Biopharma firm Parexel International Corp. (Nasdaq:PRXL) rose some 30% following solid quarterly results and Union Drilling Inc. (Nasdaq:UDRL) rallied 21% back above the 20-day moving average. On the downside, Whiting Petroleum Corp. (NYSE:WLL) shed about 15% as the firm announced a public offering of common stock.
From a charting standpoint, the market is basically hovering in a range defined by the inauguration collapse and needs to break free of that range to kick-start a more meaningful move. Today’s inside session rise on moderate volume was hardly a confidence builder; the market needs to see sustained action above 450 and an upside push through 466 to avert any slide back toward the November lows.
