Volatile session ends higher with crude slide
Small-cap stocks closed slightly lower Tuesday, but did stage an impressive bounce off four-month lows. A massive slide in crude oil prices helped offset sluggish economic data, ongoing concerns about financial systemic risk and an overseas rout in equities that underscored a lack of confidence in U.S. instruments and sparked a historic slide in the U.S. dollar. At the end of a tumultuous session, the Russell 2000 (NYSE:IWM) fell 2.15, or 0.32%, to 662.35.
The dramatic recovery rally off fresh move lows in the Russell formed a decent bullish reversal pattern on daily charts while providing some immediate validation of the March bottom by showing there are investors who see value in that zone. The sudden influx of volatility also fits with bottoming action that was forged back in January and March when the market started to trade in frantic fashion, whipsawing both longs and shorts. Just how wild was today’s session in small caps? Some of the most astounding days of the last 12 months saw the Russell trade in a 20-handle range. Today’s range was more than 26 handles; the last time we saw sessions this crazy at major turning points was back in mid-March at the lows and back in late January (also at the lows).
Once again, small caps paced the rally over the Dow and S&P 500, which is a little bit of a caution sign since the Dow/Russell spread has been collapsing during the big overall market decline off the June highs. However, small caps weren’t the only leaders today as tech stocks were mildly firm, with the Nasdaq up slightly. Also, there was some rotation into the buy-side on pharmaceuticals, with the AMEX Pharmaceuticals Index rising 1.1%.
Crude oil futures collapsed some $6 dollars a barrel, the largest one-day decline in 17 years. In an interesting twist, crude oil traders blamed the slide on worries about the U.S. economy and the fragile stock market, while stock market traders pointed to the collapse in crude oil prices as the primary motivator for today’s recovery. “Regardless of which side is wagging the dog’s tail, the market is doing what it needs to do to hurt the most people possible,” said one exasperated trader.
The tone for a brutal session was actually established in overnight trading, when markets around the world unloaded stocks and dumped U.S. dollar assets. Equity markets in Asia slumped anywhere from 2% to 4.9%, and the greenback tumbled to a record low against the euro while sinking some 1.5% against the yen. That action alone was enough to spark a slide of about 1.5% in stock index products ahead of the regular U.S. open this morning. Then a fresh batch of economic data came in below expectations and Federal Reserve Chairman Ben Bernanke later painted a sobering picture on inflation and growth in his testimony before the Senate that sent a chill through equities and prompted a slide of 2.5% to the lows before the recovery move took hold.
That’s when the break in crude oil prices, the surge in volatility and talk that the SEC would work to limit short-selling in GSEs generated a big recovery rally, Nick Kalivas, vice president of financial research with MF Global, told SmallCapInvestor.com in an email interview.
“The VIX rose to a level above 30% that coincided with a zone where some professional traders are comfortable covering shorts,” Kalivas said. Although the price action was a good sign for stocks, Kalivas was not ready to call a bottom yet. “Conditions are likely to be volatile the next few days. We have lots of big earnings still on the horizon, especially in the financial sector later this week. I think volatility suggests we are near a bottom and oversold, but we need more confirmation, both technically and fundamentally,” he said.
Given the big bounce off the lows, this morning’s economic data will likely get lost in the shuffle, but it did set a troubling backdrop for the rest of the economic releases still to come this week. On the inflation front, the PPI headline figure came in at plus 1.8%, which was well ahead of the forecast for a rise of 1.3% and the year-over-year figure was a sobering plus 9.2%, the largest rise since June 1981. On the consumer spending ledger, the news was also dour, with June retail sales up just 0.1%, well down from the median forecast for a rise of 0.4% as car sales notched their biggest drop in more than two years. Even when excluding autos, June sales were up just 0.8%, which also missed the forecast for a rise of 1%.
Although the market weathered today’s data storm, there are still further reports on inflation Wednesday morning in the form of the Consumer Price Index, which comes out at 8:30 a.m. ET. After that, industrial production data comes out at 9:15 a.m. ET, then Bernanke is once again testifying in Washington at 10:00 a.m. ET, this time in front of the House. Finally, the FOMC minutes come out at 2:00 p.m., as will a speech on the economy by Kansas City Federal Reserve Bank President Thomas Hoenig. Although the data doesn’t hold the same kind of uncertainty that it did today, there are plenty of chances for another rocky session Wednesday.
Broad market sectors on the rise today included construction materials, wireless telecoms, education services, home furnishings, footwear and motorcycle manufacturers. On the downside, thrifts and mortgages continued to struggle, as did coal, agriculture products, various energy sectors and diversified metals.
Small caps of note included Edge Petroleum Corp. (Nasdaq:EPEX), which jumped about 25% on news that the firm will be merged with Chaparral Energy and that Standard & Poor’s was considering raising the credit rating for Chaparral. CSG Systems International Inc. (Nasdaq:CSGS) rallied nearly 22% as the company will extend a contract with Comcast through 2012. Tempur-Pedic International Inc. (NYSE:TPX) jumped some 16%, recovering from fresh move lows set recently. On the downside, Sonic Automotive (NYSE:SAH) tumbled 15% as the company revised its earnings target.
