Small caps surge to four-month highs after jobs report
Small-cap stocks shot out of the gate this morning amid a wave of buying enthusiasm, with the Russell 2000 (NYSE:IWM) up 2.74, or 0.37%, at 732.48 at 9:57 a.m. ET. The early peak was at 734.84, which marks the highest point since early January. Bullish investor psychology was powered by a better-than-expected monthly employment report, which showed a decline of 20,000 payroll jobs in April — much better than the median forecast for a loss of 80,000 jobs. In addition, the headline unemployment figure came in at 5%, which was down from 5.1% last month and well above the number cruncher’s pre-release figure of 5.2%.
It should be noted that the labor market is still contracting, which is a troubling sign for the economy. Still, markets tend to trade on expectations, and when the news isn’t as bad as feared, it clears the way for buying interest to emerge. However, before March lows were carved out, the market had an unsettling way of trading higher on jobs day in recent months, only to resume the downward swing in the days following the initial reaction.
Just ahead of the employment release, the Federal Reserve added liquidity into the system, which sparked a brief flurry of conspiracy theorists that perhaps the credit crunch was rearing its head again, or that the employment report would be a bearish surprise. Clearly, the latter wasn’t the case, and it’s most likely that the timing of the move reflected the fact that the European markets were on holiday yesterday, which forced the Fed announcement to today’s session.
With the market now at the highest point since January, and at the beginning of a new month, it also will start to put pressure on fund managers who have been on the sidelines to jump in and join the fray. There are huge stocks of cash on the sideline waiting to be to put to use, and if funds start to chase the market it could extend the recent rally in equities. Also, some thought that if the dollar continues to firm, hedge funds might start to unwind long commodity and short dollar trades, which could provide a lift to equities on many fronts.
Speaking of the dollar, the greenback jumped about 100 bps in the immediate minutes after the jobs data came out this morning. The dollar is now at the highest point versus the euro since late March. However, the euro has generated a bounce of about 50 bps off the lows since the morning trough.
On the commodities front, crude oil prices were higher heading into the U.S. trading session, lifted by Turkish attacks in Northern Iraq, and by a pre-weekend profit-taking bounce following a steep decline in energy prices off the record highs notched earlier this week.
Within the small-cap spectrum, Town Sports International (Nasdaq:CLUB) jumped 24%, gapping higher on solid earnings. ComScore Inc. (Nasdaq:SCOR) rallied 21% after posting record revenue and NetScout Systems Inc. (Nasdaq:NTCT) was up 18%, gapping higher on an earnings-driven boost. On the downside, INVESTools Inc. (Nasdaq:SWIM) tumbled 35%, gapping lower on heavy volume after sloppy earnings and Magma Design Automation (Nasdaq:LAVA) was off 27% after earnings news.
Given the focus today on the jobs data, earnings might briefly take a back seat, but we are still in the heart of the reporting season. Small caps slated to report earnings throughout today’s session include: Kaman Corp. (Nasdaq:KAMN), Federal Signal Corp. (NYSE:FSS), Calgon Carbon Corp. (NYSE:CCC), National Interstate Corp. (Nasdaq:NATL), Stoneridge Inc. (NYSE:SRI) and Penwest Pharmaceuticals (Nasdaq:PPCO).
From a technical analysis perspective, the opening rally in the Russell lifted the market through chart resistance at 731, which marked a double top back in early February. That area now will act as support during the session. The next resistance spots of note are at 735 and 743. If the market can’t develop traction off the early jobs rally, then support below 731 is at 725 and 720.50.
