Small caps mount epic recovery despite ongoing financial scare
Small-cap stocks edged higher Thursday, shrugging off steep morning declines tied to the credit crisis as gains in commodity, manufacturing, transportation and tech stocks shifted focus away from the perilous financial landscape. In the end, the Russell 2000 (NYSE:IWM) closed up 1.83, or 0.26%, at 719.00; meanwhile, the Dow was up 1.46% and the S&P 500 was up 1.38%. For the year, small caps are still holding up much better than their big-cap brethren, with the Russell down 6.1%, the Dow off 13.8% and the S&P 500 down 14.9%.
At one point early this morning, the Russell was down more than 2% and appeared on the verge of a calamitous downside breach of key “figure” support along the 700 line. However, buyers came back into the market, braving not just fears about fragility in the financial arena, but also looking past a fresh batch of worrisome economic data as well. Tech stocks were clearly the early bedrock of the bulls, with the Nasdaq 100 never showing the kind of morning worries that seized other index products.
A key part of the mid-morning climb off those scary opening lows was yet another intriguing rally in commodity stocks, a rally that lately has defied price action in the physical market. However, as the day progressed, leadership on the buy-side shifted into the manufacturing, transportation and internet side of things. For the day, crude oil prices tumbled $1.71 a barrel to $100.87, while dipping to the lowest intraday point since April. In an interesting side note, the Commodity Futures Trading Commission today said that they could not say that speculators were to blame for the surge in oil prices this summer.
The sell-off in commodity markets was fairly broad in scope, pressured by a rise in the U.S. dollar, which made new multi-month highs against the euro, and 2 ½-year highs against the U.K.’s pound sterling. Normally, it would be convenient to highlight currency strength as a sign of international interest in U.S. assets, but the story appears to be primarily one of concern about global growth — particularly out of the eurozone economy.
Action in the financial arena continues to stir up caution, as the credit crisis has put the nation’s fourth-largest investment bank seemingly on the ropes. Lehman Brothers Holdings Inc. (NYSE:LEH) remained the focal point for the ongoing credit crunch again today as stock in the company collapsed another 46% as the company reels from losses tied to debt write downs and struggles to round up investors to infuse capital into the firm. Other big-name financial firms like Merrill Lynch & Co. Inc. (NYSE:MER) and American International Group Inc. (NYSE:AIG) were also getting hammered, losing 18% and 7%, respectively. Despite those startling losses from famous names, the overall financial and banking sectors were basically flat on the day.
Individual small caps of note today include CEVA Inc. (Nasdaq:CEVA), which was up about 11%. Also, lululemon athletica Inc. (Nasdaq:LULU), climbed nearly 11% on strong earnings and news the retailer plans to add 35 new stores in the next few years. US Airways Group Inc. (NYSE:LCC) was up 9% with the slide in energy prices. On the downside, Kenexa Corp. (Nasdaq:KNXA) tumbled 27%, gapping lower and sinking on unusually brisk volume as the firm updated 2008 guidance. Also, Ticketmaster (Nasdaq:TKTM) tumbled some 21% to fresh move lows.
The chart structure for small caps still retains a top-heavy bias, but the recovery off today’s lows left some mild positive signs on daily charts. First off, the market violently rejected a push to fresh move lows and closed in the upper portion of the day’s range, which is a good sign. Also, the market rallied hard off key support approaching 700, which is an important psychological road mark for the Russell. Looking ahead to Friday’s action, a weekly close above 700 will be critical for the overall health of small-caps, while some type of miracle push back above 735 would also be a victory for the bulls.
Speaking of Friday’s session, the market will once again have to navigate some important economic landmines, including key information on inflation and retail sales ahead of the regular market opening, then sentiment data early on into the session. The stock market was able to look beyond soft economic data Thursday, as the weekly unemployment claims report came in at 445,000, which was above the projection of 438,000. Of even greater concern is that the continuing claims figure was at 3.52 million, which was the highest level since October 2003, and which provides further confirmation that the labor market in America is already in recession mode, even if the economy isn’t there yet. One thing that the combination of weak data and the shock on financial shares has done is shift the focal point on the interest rate outlook from a tightening bias to an easing tone. Clearly the Federal Reserve can’t take on inflation with rate hikes when unemployment is at five-year highs and the Treasury Department is busy bailing out large financial institutions.
