Small caps upbeat on banks despite Dow dip
Small-cap stocks edged higher Monday, bucking a downdraft in other large-cap index products as more good news in the banking arena surfaced. In addition, movement into smaller energy and commodity stocks provided a lift to the Russell 2000 (NYSE:IWM). The small-cap benchmark gained 4.55, or 0.66%, to 697.63.
Large-cap indices also were pulled down by a slump in pharmaceuticals, with Merck and Co. (NYSE:MRK) and Schering-Plough (NYSE:SGP) taking a dive ahead of earnings on news that the cholesterol drug Vitorin didn’t deliver the goods in a heart study. The slide in pharma shares came despite a jump in Genentech Inc. (NYSE:DNA) shares on news of a buyout offer from Swiss firm Roche Holdings.
In today’s action, large-cap stocks also appeared to be more troubled by a bounce in crude oil prices than did small-cap shares. Crude oil prices rose $2.16 dollars a barrel, or 1.6% to $131 as the market braced for the first storm event of the year. Tropical Storm Dolly could reach hurricane status Tuesday as it moves into the Gulf of Mexico, but for now the storm track seems unlikely to create a major supply disruption out of Gulf production.
Energy markets also likely were underpinned by a soft tone in the U.S. dollar to start the week. The greenback slipped about 0.5% against the euro and about 0.2% versus the yen, which provided a lift to some commodities markets, including gold and copper. The iPath GSCI Total Return commodities index was up about 1.5% on the day.
Once again, the bullish side of things was dominated by a surprise earnings report in the banking sector. Last week, Wells Fargo & Co. (NYSE:WFC), JP Morgan (NYSE:JPM) and Citigroup (NYSE:C) all beat the Street’s forecast and today saw Bank of America (NYSE:BAC) top expectations. The recent spate of good news on the banking front has helped to shore up negative sentiment toward the financial arena, which hit a fever pitch early last week as talk circulated that government-sponsored enterprises were on the brink of failure, and as IndyMac bank was put into FDIC receivership. However, a bailout plan from the Treasury on the GSE front has restored confidence into mortgage lending giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). Although the two stocks were mixed today, they are well off the panic lows from a week ago. Treasury Secretary Henry Paulson restated ahead of the close today that GSEs were critical to capital markets and that a strong signal for stability needed to be sent.
On the economic data front, the leading indicators report came out this morning and was completely ignored in favor of earnings news. Since the data is a little dated (June numbers) it often slides under the radar screen. What’s more, a huge number of big companies will release quarterly results this week and the economic calendar is a yawner anyhow. For those keeping track, the leading indicators headline figure came in at minus 0.1%, hitting the forecast on the nose. Looking ahead to Tuesday’s session, Federal Reserve official Charles Plosser will talk about the economic outlook at 8:30 a.m. ET.
Broad market sectors on the rise today included coal, oil refining and marketing stocks, fertilizer shares, steel, home furnishings, metals and mining and oil exploration and production companies. On the downside, investment banking and brokerage stocks were out of favor, as were specialized finance, electrical retail and department store shares.
Small caps of note were highlighted by Gibraltar Steel Corp. (Nasdaq:ROCK), which jumped 25% on an analyst upgrade. Palm Harbor Homes (Nasdaq:PHHM) rallied nearly 15% and Orbitz Worldwide Inc. (NYSE:OWW) surged 24% and continues to rise after hitting 52-week lows last week. ArthroCare Corp. (Nasdaq:ARTC), gapped lower and shed 42% on unusually heavy volume as the firm said it will restate results due to incorrect accounting methods. Badger Meter Inc. (NYSE:BMI) rallied some 12% following earnings news.
After a couple of weeks of extreme volatility, the Russell 2000 traded in an unusually tight range today. Either the market needed a little breather from the dramatic price movements, or is coiling for another big breakout move. Small caps need to tackle resistance overhead at 707.50, then at 717.50 to provide further validation of the bottoming action suggested by last week’s big recovery off fresh move lows.
