Small caps in rally mode ahead of FOMC
Small-cap stocks extended the rally into mid-session trading, boosted by a bounce in the financial arena, which has been a notable source of weakness in previous days. In addition, homebuilder, retailer and insurance firms were strong performers today and the raft of companies fitting those profiles in the small-cap universe helped the Russell 2000 (NYSE:IWM) outperform the Dow and S&P 500. At 12:31 p.m. ET, the Russell was up 12.84, or 2.84%, at 465.41.
The financial sector got a lift from Goldman Sachs Group Inc. (NYSE:GS), which reported quarterly results that were awful, but which the market embraced as a sign that “the kitchen sink” was tossed into the loss. GS shares were up 9.1% at midday. The Securities Broker Dealer Index was up 5.6% and the KBW Bank Index was up 3.6%.
Homebuilder shares have been on a roller coaster ride lately, but retain a potential bottom on long-term charts and were back on an upside tilt today after sinking on Monday. The ISE Homebuilder Index was up 5.6%, with small-cap firm KB Home (NYSE:KBH) rising 7.1%. It was interesting to see homebuilder shares doing so well today despite a terrible report on housing starts, which tumbled to a record lows and were off 18.9%.
Retail stocks also were doing well today after Best Buy Co. Inc. (NYSE:BBY) reported strong quarterly results and cost-cutting efforts to brace for a potentially sluggish holiday season. BBY shares were up 15.2% today and the S&P Retail Index rose 2.3%.
Another clear source of strength today came from insurance stocks, with the S&P Insurance Index climbing 4.2%. Small-cap firm Genworth Financial Inc. (NYSE:GNW) soared some 40%, climbing to the highest point since early November.
The market now will go into a waiting mode for the 2:15 p.m. ET FOMC policy announcement. The Fed is widely expected to lower the Fed funds target by 50 basis points down to 0.5%, but futures markets are pricing in a 60% chance for a 75-bp cut. The big reaction will likely come from the Fed’s statement, as the market strives to see what the Fed might do to bolster a sagging economy now that interest rates are approaching zero.
Individual small caps of note today included Maidenform Brands Inc. (NYSE:MFB), which rallied 15% as the intimate apparel maker mounted a recovery off Monday’s big decline. Terra Industries Inc. (NYSE:TRA) rallied 13% as the fertilizer company also mounted a big bounce off Monday’s pullback. On the downside, Satyam Computer Services Ltd. (NYSE:SAY) tumbled 56% on unusually heavy volume as the Indian software firm said it will invest $1.6 billion on two infrastructure firms.
With the Russell solidly above 461, the next key test is at 473, which marked the Black Friday peak. If the market takes flight after FOMC, then 481.50 and 491 are the next upside road markers of note. Conversely, a slide back down after FOMC leaves 450 and 442 as the support points to watch.
