Small caps reverse slide as retail, chip stocks climb
Small-cap stocks staged an impressive bullish reversal Thursday, rejecting a morning slide to five-week lows as a rally in retail and chipmaker stocks plotted an afternoon recovery course for stocks in general. Talk of another large government money float to embattled banks also played a role in turning the selling tide. The Russell 2000 (NYSE:IWM) closed up 9.45, or 2.09%, at 462.62, and is now down 7.4% for the year. Meanwhile, the Dow is off 6.4% for 2009, while the S&P 500 is down 6.5%.
The market appeared to pull off the bounce highs when news hit in the final half hour of trading about a plane crash in New York, but there were no signs of foul play and it appears the crash was the result of a flock of geese, which appeared to calm the market into the close and allow the rally in small caps to resume. Right after the close, a passenger on the plane told CNN that he thought everyone was rescued from the flight.
Investors fretted through the morning about reports Bank of America Corp. (NYSE:BAC) needed money to integrate the Merrill Lynch acquisition and also as Citigroup Inc. (NYSE:C) continued to see share prices collapse. However, rumors started to leak that the Treasury Department would provide more capital for the embattled banks and as the recovery started to take hold CNBC reported that the government would extend guarantees to BAC of $100 billion to $200 billion. While BAC and C were still sharply lower on the day, they did rally quite a bit off the intraday lows. News reports said that BAC would receive some $15 billion in TARP funds and will announce it officially with earnings news Tuesday.
In addition, House Democrats released plans for an $825 billion stimulus plan and the Senate was slated to vote on the $350 billion in TARP funding this afternoon, raising hope among many that a fresh spigot of taxpayer money was about to be released to shore up the ailing financial arena.
Even as the market was sinking through midday trading today, retail stocks were hanging tough, suggesting that investors were scouting for buying opportunities. For the day, the S&P Retail Index charged up 3.7%.
“It is interesting that the chip sector has traded well on the back of soggy earnings from Xilinx Inc. (Nasdaq:XLNX). There is talk that Taiwan foundries have received some rush orders pointing to improved demand,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview.
Kalivas also said that there were favorable analyst comments on the retail sector, generating a nice rally in names like Home Depot Inc. (NYSE:HD) and Lowe’s Companies Inc. (NYSE:LOW), which were up 4% and 5%, respectively.
“Seeing strength in retail and semis is a bullish sign in a market that has been worried about the health of banks. Weak crude oil prices and a lower than expected draw on natural gas stocks pressured energy shares, while retail seemed to see the drop in gas prices and budding refinance activity in a positive light,” Kalivas said.
Along those lines, mortgage rates on 30-year fixed loans hit record lows this week and mortgage applications have tripled in less than two months. Everyone seems to be scrambling to refinance and the government is helping things by scooping up mortgage-backed securities. Just this afternoon, the Federal Reserve reported that they have bought some $23.4 billion in MBS paper for the week ended Wednesday.
Crude oil prices took another hit today, sinking 5%, or $1.88 dollars, a barrel to $35.40. The break on fuel costs appeared to lift air carrier and retailer stocks. The AMEX Airline Index gained 4.5%, holding positive even after news of a US Airways plane crash into the Hudson River in New York. Small-cap carrier US Airways Group Inc. (NYSE:LCC) shares were up 2.3% on the day, holding in positive territory after the crash, but considerably off a 12% gain before the crash news.
Today’s chart action in the Russell generated an impressive bullish reversal formation on daily charts and the market once again rallied fast off a breach of 450. Recent downside action has taken some air out of the immediate bullish picture, but the market remains in an elongated sideways consolidation that has bottoming potential. It will be important for the Russell to close out the week after Friday’s economic data above 450 (and preferably quite a bit above 450). Looking ahead to Friday’s action, the market will get another reading on inflation (yawn—there is no price inflation right now), but will also get reports on industrial production and consumer sentiment.
Speaking of economic data, today’s reports on inflation (PPI), weekly unemployment claims, NY Manufacturing activity and the Philly Fed survey were basically in line with expectations, reflecting an economic that is struggling through a deep recession. Traders seemed to be focused on other news events today, particularly banking, stimulus plans and retailer events.
