Small caps lifted to highest daily close of 2008
Small-cap stocks took flight Thursday, soaring in response to strong chain store sales, and a bullish surprise on weekly unemployment claims. The Russell 2000 (NYSE:IWM) shot up 19.55, or 2.63%, to 763.26, the highest daily close of the year.
In the process, the Russell stormed through key long-term resistance at 750, a point that had been difficult to tackle in recent weeks. That area represented a 50% Fibonacci retracement of the entire bear market collapse, and sets the stage for a rally toward the final key retracement of 61.8%, which is near 775. The market could pause near 760, which is a logical chart-related resistance area on the way toward 775. A weekly close above 750 after jobs Friday would be an important benchmark within the ongoing rally off the March lows.
The strong performance was impressive in front of Friday’s employment report, which suggests that shorts were no longer willing to risk losing trades in front of the big release, and that new longs were comfortable taking on positions ahead of the jobs event.
The catalyst for today’s rally appeared to center on surprisingly stout monthly chain-store sales results. Apparently gasoline pump prices near $4 dollars a gallon didn’t stop consumers from heading out to the store to unload some of their tax rebate money from Uncle Sam. With the U.S. economy heavily dependent on spending for momentum, a show of strength from retailers is a welcome sign to the market.
Among retailers, discounters like Costco (Nasdaq:COST) and Wal-Mart (NYSE:WMT) had particularly impressive results, with Costco comp sales up 9% in May and Wal-Mart up 3.9%. Wal-Mart’s stock embraced the news, surging 3.5% to four-year highs. Costco was up 3.4%. And it wasn’t just a large-cap story on the retailer front. Small-caps Hot Topic Inc. (Nasdaq:HOTT) jumped some 16% as sales at the pop culture apparel and accessories store came in much better than feared. Also, Cache Inc. (Nasdaq:CACH) rose about 14% as sales at the specialty women’s apparel store were up 5% in May.
The strong rally in equities was impressive in the face of a sharp upward draft in crude oil prices and a big decline in the dollar against the euro. Crude oil prices were hovering near four-week lows early in the session, but caught fire amid a sinking greenback to jump some $4 dollars a barrel back above $126. The big slide in the dollar was triggered by talk from European Central Bank officials that rate hikes could be seen in Europe this year. The sudden surge in energy values sliced morning gains in airline stocks, but carriers still managed to post gains on the day following analyst upgrades for United (Nasdaq:UAUA) and Northwest (NYSE:NWA). United Airlines was up about 9% on the session, while Northwest jumped some 13%. Small-cap US Airways (NYSE:LCC) was up about 6% as well.
Before the market even opened today, investors were greeted by yet another positive surprise on the employment front. Weekly unemployment claims came in at 357,000, well below the forecast for 375,000. Earlier this week, the ADP private payroll survey showed a surprising rise in jobs, so investors may be expecting that the third jobs report will also be a charm Friday morning. Certainly, the big rally in front of the employment release sets the stage for the market to need another jolt of good news.
The credit crunch jitters that have resurfaced this week appeared to take a backseat today as the market focused on the strong retailer results and jobs data. A midday announcement that Standard & Poor’s lowered ratings for a couple of bond insurance firms pulled large-cap index products off the highs, but both of the firms mentioned — Ambac (NYSE:ABK) and MBIA (NYSE:MBI) — were able to close in the green despite the ratings news. Considering Ambac was a $30 stock six months ago and now is a $2.65 stock, perhaps it’s much ado about little anyhow. The big concern on the credit front this week has been Lehman Bros. (NYSE:LEH), but the brokerage firm hammered out a 8% rally Thursday, keeping those concerns on the backburner for now.
Among broad market sectors today, the top performers were steel, distillers and vintners, metals and mining, specialized finance and airlines. Losing sectors were hard to find, but sellers did gravitate toward homebuilders and automobile manufacturers.
As for individual small caps, Sequenom Inc. (Nasdaq:SQNM) jumped 21% on news that positive results have been seen for the firm’s Downs Syndrome tests. Also, TRC Companies (NYSE:TRR) rallied 16% without any apparent fresh news for the move. Borders Group Inc. (NYSE:BGP) jumped about 17% as the company announced plans to sell 30 stores in Australia, New Zealand and Singapore for roughly $110 million.
Small caps unable to join the buying party today included Blyth Inc. (NYSE:BTH), down some 14% on earnings news. Also, Jackson Hewitt Tax Service (NYSE:JTX) was off about 6% after reporting profits tumbled 13% during the crucial tax season quarter.
Looking ahead to Friday’s session, the morning trade will likely be dominated by the employment numbers. With small caps now at the highest prices of the year, shorts are in a difficult equity position and find themselves needing a bearish surprise on the jobs report to bail them out.
