Mild dip in choppy trade as HPQ outlook counters weak overseas trend

Kevin Pendley | Nov 18, 2008 10:20am EST | Comment

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Small-cap stocks opened higher, then turned slightly down as investors juggled tame inflation data, sinking Asian stocks, ongoing worries about the economy and testimony about the TARP against an optimistic profit view by a major computer maker. At 10:06 a.m. ET, the Russell 2000 (NYSE:IWM) was down 0.94, or 0.21%, at 450.36.

The “big” event so far this morning was the earnings release from Hewlett-Packard Co. (NYSE:HPQ) as the world’s largest PC-maker topped the estimate, but more notably raised guidance, which has been unheard of in recent corporate profit reports. The HPQ news clearly triggered a sizable bounce off the overnight lows in stock index futures ahead of the regular open, and bolstered investor psychology early on today.

On the inflation front, the headline producer price index tumbled by 2.8%, which was the largest decline on record, fueled largely to a collapse in energy prices. The “core” rate, which excludes volatile food and energy prices was actually up 0.4% and is up 4.4% on a yearly basis, the biggest climb in 19 years. The consumer side of the equation will be released Wednesday morning. Clearly, prices have tumbled hard, completely erasing inflation worries at this stage of the economic decline.

Crude oil prices were down solidly overnight, but climbed back into positive territory ahead of the stock market open. Oil services shares were lower overseas and commodities were down in Europe, which could keep a defensive posture in play for energy and other commodity-themed stocks early today.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were on Capital Hill this morning to update progress on the TARP (the government’s $700 billion financial bailout plan). Paulson said that the TARP needs to be preserved to allow flexibility and the package is designed to help the financial system and is not a panacea for all economic problems. He also said that the housing market collapse is the root of the downturn and that a slowing economy may prolong the issue. Investors have been concerned that the administration recently switched streams on how to apply TARP funds, and a perception persists that a definitive plan has still not been devised and implemented and that the administration simply hops around putting out fires when they appear.

The ability for stocks to push into positive ground briefly this morning despite steep declines in stock markets around the world overnight was impressive. About an hour ahead of the open, shares in Europe were off nearly 2%, Asian equities took a hit last night and emerging markets were down more than 3% earlier today. The market has had a penchant for violent moves in the final hour of trading as hedge fund redemptions (or on up days, the lack thereof) have been a whipsaw on the market. It will be interesting to see if today’s opening rally can be sustained throughout the session.

The U.S. dollar was hovering near flat levels early this morning, but found some buying interest on reports that net capital inflows jumped to $143.4 billion in September, up from $21.4 billion in August as investors around the world looked to U.S. assets for safety in a global storm.

Individual small caps on the move this morning included Chilean ADR Madeco SA (NYSE:MAD), which jumped 20% on light volume as the copper cable and pipes manufacturer gapped higher. It should be underscored that trade on this ADR is typically sparse. Targanta Therapeutics Corp. (Nasdaq:TARG) was a featured small-cap in rally mode Monday and the move was extended today – in fact, TARG made new 52-week highs this morning as it was up about 11% in the wake of news that the FDA will review the firm’s new drug application for a skin infection treatment. Chiquita Brands International Inc. (NYSE:CQB) jumped 13% as the bananas distributor tries to climb out of 52-week lows set last week. On the downside, DivX Inc. (Nasdaq:DIVX) tumbled 17% as the digital media company announced earnings and also filed a lawsuit against Yahoo for breach of contract.

The chart picture in small caps retains a strong long-term bearish bias, but the market is striving to establish a foundation level near 450. If that line is breached today, then the next support points of note are at 442, then at 433. On the upside, resistance is at 464, then at 479.