Stout retail sales, crude oil dip spark Russell bounce
Small-cap stocks shot higher on the opening, lifted by surprisingly stout retail sales, and an overnight slide in crude oil prices. At 10:01 a.m. ET, the Russell 2000 (NYSE:IWM) was up 10.99, or 1.53%, at 728.87.
Business inventories data came out at 10:00 a.m. ET and were above the forecast at 0.5%, but had little impact on the market, overshadowed by the earlier retail sales release.
It’s worth noting that the market was already in rally mode well before the retail sales report topped the forecast. Buying enthusiasm was fueled overnight by merger and acquisition talk surrounding Budweiser (NYSE:BUD), by a decline in crude oil prices and a rally in the U.S. dollar. Budweiser shares were up 6% shortly after the opening.
The headline retail sales figure came in up 1%, which was well clear of the forecast for a rise of 0.5%, and the ex-autos figure also topped the forecast, coming in at 1.2%, compared with the forecast of 0.7%. The upside surprise in retail sales was enough to overshadow a jump in unemployment claims, which climbed to 384,000 compared with the forecast of 370,000. It marked the highest point for continuing claims since February 2004. Also, the import price data hit the forecast on the nose, but it still reflected the largest three-month increase since October 1990.
By the time the market opened, immediate gains from the retail sales report were already trimmed as news of a shakeup in the power structure at Lehman Bros. (NYSE:LEH) pulled down the market, at least initially. Lehman Bros. shares were off about 5% in erratic trading shortly after the open, but bounced back into the green about 25 minutes after the open. Lehman shares have been sinking of late, and collapsed about 50% in just four weeks, while keeping the credit crunch fears on the front burner.
Despite all the negative news surrounding Lehman and ongoing worries about the credit crunch, Morgan Stanley analysts issued an upgrade for financial stocks and downgraded the energy sector.
Earlier this morning before the opening, Philadelphia Federal Reserve President Charles Plosser said on CNBC that interest rates “will have to rise” and that the Fed needs to act preemptively to make sure inflation expectations stay contained. Plosser’s comments sparked declines in bond markets, but appeared to have little immediate impact on stock index futures or the dollar, which were already in rally mode before he spoke and before the retail sales figures were released.
Yields on the benchmark 10-year note made new highs for the move this morning as bonds and notes slumped, which may have sparked some money flow into stocks away from credit instruments. The 10-year yield is now at the highest point since late December.
Overseas stock markets were mixed overnight, with European shares higher, but Asia stocks mostly lower. An analyst recommended selling emerging market stocks and moving into cash, which may have weighed on some of the Asian markets.
Broad market sectors on the rise this morning included brewers, health-care facilities, home furnishings and homebuilders. On the downside, agriculture products, gold and oil-related stocks were attracting sellers.
Small caps of note today on the upside included Cyberonics Inc. (Nasdaq:CYBX), which gapped higher on solid earnings and was up almost 6% shortly after the open. Spartech Corp. (NYSE:SEH) rallied some 21% on positive earnings news. Talbots Inc. (NYSE:TLB) surged about 10% as the women’s apparel retailer said they had secured a $50 million credit facility.
On the downside, National CineMedia Inc. (Nasdaq:NCMI) tumbled 18% early, gapping lower to 52-week lows in the wake of earnings news. Chindex International Inc. (Nasdaq:CHDX) was off 15%, also sinking after soft quarterly results.
It will be interesting to see if small caps can sustain the opening rally today. The market has closed below opening levels consistently since rejecting new move highs last week, unable to gain traction. It is important for the Russell to hold sway above 720.50 support, as persistent action below that point would suggest another market failure off the highs and would carry a target move to 690. If the rally does hold up as the day progresses, then resistance comes in at 728.50 and 729, then at 736.
