Small caps rally as crude sinks, sentiment data improves
Small-cap stocks went into rally mode Tuesday, quickly reclaiming lost ground from Monday’s downward spiral as crude oil tanked and consumer sentiment perked up from the abyss. The Russell 2000 (NYSE:IWM) closed up 18.44, or 2.65%, at 714.55, generating the 10th-largest one-day rally of the year. This also marked the fourth one-day gain in July of 2% or more. The only other month this year that saw that many 2% rally days was in March — when the market forged an important bottom.
During the session, crude oil prices shed more than $3 dollars a barrel, retreating below $121 while approaching three-month lows. By the close, crude was off $2.54 dollars to $122.19. Concern about the demand side of the equation continues to discourage energy bulls, and OPEC president Chakib Khelil said that crude oil prices could tumble to the $70- to $80-range if the U.S. dollar strengthens and if political tensions ease in the Middle East. The U.S. dollar jumped to four-week highs against the euro, heating up talk that the short dollar/long energy hedge fund trade was still being unwound. The greenback was on a roll against the yen, rising to four-week highs, while gaining about 0.6%.
The recent collapse in crude oil prices (crude is off some 17% from the July peak) has been a welcome sign to stock market investors who worried that persistent gains in the energy market would have crippled consumer spending and thwarted any recovery attempts in the U.S. economy — especially with the housing market still reeling.
Speaking of the housing situation, the Case-Shiller Home Price Index came out today. To no one’s surprise, the Index slipped to record low levels and suggested that home prices were at four-year lows. However, the report was in line with expectations, the data is for the May time frame, and was completely overshadowed by the consumer confidence report, which came in well above expectations. The headline figure for consumer confidence was at 51.9, which easily topped the analyst forecast of 50. It should be noted that 51.9 is still a low number historically, but with crude oil sinking, the dollar surging and several key economic numbers still on tap this week, a good sentiment figure simply made it even more difficult for the shorts to operate with abandon.
One very impressive facet of today’s rally was a surprising show of strength in the financial and banking sectors. Stock markets around the world shuddered last night when Merrill Lynch (NYSE:MER) announced $5.7 billion in debt write-downs and said they would raise $8.5 billion in capital through new stock sales. In essence, the Merrill news sparked fears of another bout in the credit crunch crisis. As a result, stock markets in Asia were soundly beaten down, but perhaps they will recover overnight now that U.S. markets have survived the scare. By the end of the day, MER shares actually closed higher, gaining some 6%. The Financial Select Sector SPDR rallied 6% and the PHLX KBW Banking Index rallied 7%
Lest we forget amid all the excitement surrounding the crude oil slump, this remains a key week for earnings. So far, the earnings news has been a mixed bag, but there were some positive signs from varied fronts that investors embraced today. In the pharma zone, Amgen (Nasdaq:AMGN) beat the estimate and rallied about 3% a day after jumping 12% on news of a successful trial for its osteoporosis drug. Also, Colgate-Palmolive Co. (NYSE:CL) rallied 9% on solid earnings and United States Steel Corp. (NYSE:X) surged 13% on positive quarterly results. That’s not exactly three stocks you’d typically mention in the same paragraph, but investors hope that it reflects a broad-based recovery for market overall.
From a broad market perspective, the best performing sectors today were thrifts and mortgage finance firms, homebuilders, steel, building products, diverse financial services firms, diversified banks, regional banks and various REITS. On the downswing, gas utilities, oil exploration and production, gold, oil and gas drillers and oil equipment stocks were taking a beating.
Among individual small caps, big movers included ILOG S.A. (Nasdaq:ILOG), which jumped 31% on news that the firm will be bought by IBM for roughly $340 million. UAL Corp. (Nasdaq:UAUA) surged 21% as the entire air carrier sector got a boost from the crude oil decline. The AMEX Airline Index was up 11% and US Airways (NYSE:LCC) was up 15%. Gevity HR Inc. (Nasdaq:GVHR) rallied 20% on solid earnings news and Headwaters Inc. (NYSE:HW) surged 24%, also on earnings. Small caps bucking the uptrend were highlighted by The Providence Service Corp. (Nasdaq:PRSC), which collapsed 48% as the firm restated forward guidance. Virtual Radiologic Corp. (Nasdaq:VRAD) slumped 25% as earnings disappointed and B&G Foods Inc. (NYSE:BGS) was off 10%, also tied to quarterly results.
Looking at the chart picture, it’s supportive to see that Monday’s big slide had zero followthrough and that the recent pullback stalled well short of key Fibonacci retracement targets. The market still faces resistance at 717.50 and 726 and must continue to hold above 684 through all the big data event risk still to come this week.
