Snap-back oversold bounce for banks; IBM profit news helps
Small-cap stocks took flight today, notching the biggest one-day gain of 2009, just one day after sinking to the worst performance of the New Year. The topsy-turvy world of equity market investing set aside the gloom from Tuesday’s slide amid strong earnings from technology bellwether IBM, and money flow benefited stocks as Treasury markets tumbled. The Russell 2000 (NYSE:IWM) soared 23.12, or 5.33%, to 456.76; for the year, small caps are still down 8.5%, on target for the worst January showing in more than 15 years. Meanwhile, the Dow is down 6.2% for the year and the S&P 500 is off 7%.
The fact that small caps led the way on the rally today is a positive sign amid plenty of gloom for the marketplace. Investors will have to become more comfortable embracing risk for the market to truly rally off these bear market lows, and putting their faith in small caps would be an interesting development — but as you can see by the yearly return, that leap of faith hasn’t been made yet.
The market was oversold on short-term momentum studies entering the session after suffering the worst inauguration day collapse in history. An upbeat profit reading from International Business Machines (NYSE:IBM) set the stage for a bounce back rally today, but the market still needs to extend the move to suggest that the inauguration day slide was the anomaly and not today’s recovery.
The market has been buffeted with poor profit reports for months and a majority of the news so far this year has been gloomy, but when IBM beat the estimate after Tuesday’s close, it raised hope that things aren’t really as bad as feared. In addition, bank stocks have been relentlessly hammered in recent days, but Northern Trust Corp. (Nasdaq:NTRS) handily beat the forecast as well, showing that not all banks are wallowing in a sea of red ink needing a handout from taxpayers to survive these rocky times. NTRS stock jumped 30% on the day, and IBM climbed 11%, providing a nice tech/financial one-two leadership punch.
Of course, that doesn’t mean that everything is now all rosy for the market. Although this week’s economic calendar is basically non-existent until we get to housing starts and weekly claims Thursday morning, there were some minor numbers out today, including Johnson-Redbook retail sales which fell 2.3%, the Architecture Billings Index, which showed interest in new projects at a record low, and the National Association of Home Builders Housing Market Index, which fell to 8 from 9 in December.
“Before the onset of the current recession, the record low for the HMI was 20.0 during the 1990-91 recession. The question now is: what is the low for the HMI? The answer is unknown, but we can say that the severity of the housing market situation grows in leaps and bounds everyday,” Asha Bangalore, economist with Northern Trust, said in an email report. Looking ahead to Thursday’s housing starts report, Bangalore said, “The HMI is strongly correlated with sales of new single-family homes. Based on this historical relationship, it appears that a pickup in new sales in the near term is unlikely.”
Energy prices provided a source of strength for the market today, with energy stocks climbing 6.7%. Crude oil prices rose 6.6% on the day, with New York futures climbing $2.71 a barrel to $43.55. If those prices seem suddenly higher, it’s because the New York market rolled out of the February contract into March, which has been trading at a steep premium to the February futures contract. Even after the close of the New York market, crude continued to climb, bolstered by the rise in equities, a slide in the U.S. dollar and production cuts out of OPEC.
Looking at sector activity today, diverse financial services shares, investment banks and brokerage companies, asset management firms, banks and real estate investment trusts were the biggest gainers. The KBW Banking Index rallied 14% after getting walloped on Tuesday and the Financial Select Sector SPDR Fund was up nearly 15% as investors scoured for bargains on downtrodden financial firms and shorts looked to book profits. On the downside, automobile manufacturers, auto parts suppliers, hypermarkets and apparel firms were soft performers, but losses in those areas were much less pronounced than the gains for banks, financials and energy companies. Airline stocks struggled in line with overnight losses for the group, and UAL Corp. (Nasdaq:UAUA) reversed initial gains on earnings news to close down 6%. Small-cap carrier Alaska Air Group Inc. (NYSE:ALK) was down 7%.
Individual small caps on the move today included Alico Inc. (Nasdaq:ALCO), which rose nearly 28%, as the land management company wiped out a huge decline from Tuesday’s session without any apparent fresh news to fuel the recovery bounce; but the rise fit with the strong performance today from REITS. Financial services company Sanders Morris Harris Group Inc. (Nasdaq:SMHG) jumped 20% after setting a new move closing low on Tuesday. Integrated Electrical Services Inc. (Nasdaq:IESC) rose 19% on moderate volume, also without fresh news. On the downside, Omnicell Inc. (Nasdaq:OMCL) tumbled 22%, gapping lower on unusually heavy volume after the software solutions firm updated guidance.
The chart picture for small caps reflects an inside session bounce today, which takes some of the bullish enthusiasm out of the move. It was nice to see the Russell climb back above 450 quickly, but the overall market path remains a sideways consolidation, with a mild short-term bearish slant. A push above 466 would help further any bottoming argument here, while any slide back below 450 (and especially 440) would be damaging.
