Small caps rise with techs, crude dip

Kevin Pendley | Aug 06, 2008 4:44pm EDT | Comment

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Small-cap stocks pushed higher Wednesday, bolstered by a rally in tech stocks and another soothing pullback in crude oil prices. The Russell 2000 (NYSE:IWM) gained 4.85, or 0.67%, to 725.90, the highest daily close since June 19.

Importantly, small caps finally broke free of the recent trading range. Sustained action above 726 is still needed to validate the upside breakout. Today’s rally also confirmed a breach of trendline resistance from both the June peak and the previous July high, which adds to the chart-related glow.

Crude oil prices slipped to 3-month lows today when the weekly inventory report showed a larger-than-expected build in crude oil stocks. The report reflected an increase in stocks of 1.7 million barrels, well beyond the forecast for a rise of 300,000. Still, gasoline stocks had a surprisingly large drawdown of inventory, which took some of the bearish sting out of the crude data. Overall, the weak tone in crude oil continues to provide a cushion for equity markets, providing some hope that consumers will spend less at the gas pump and more on other endeavors.

The U.S. dollar jumped hard today against the Japanese yen, climbing to 7-month highs against that currency, which also extended the recent rally against the euro. An appreciation in the dollar suggests a stronger economic tone for the United States compared with other world economies, and can also spark investment flow into American companies.

Tech stocks started out the day in a leadership position following stronger-than-expected earnings news from Cisco Systems Inc. (Nasdaq:CSCO) overnight. CSCO gained nearly 6% on the day, and helped pace the tech-laden Nasdaq 100 Index to a hefty 1.3% advance on the session. Other tech stocks of note included Microsoft Corp. (Nasdaq:MSFT), which rallied 3%, and Oracle Corp. (Nasdaq:ORCL), which gained almost 3%. Investors saw the gains in tech stocks as a positive sign about the economy. Despite the gains in tech shares, there were still important sectors that struggled, including retailer shares, select financial stocks and mortgage firms.

The top performing sectors today were interestingly diverse: metals and mining, coal, agriculture products, home entertainment software and communications equipment. On the flipside, thrifts and mortgage finance firms were hammered. Freddie Mac (NYSE:FRE) fell nearly 20%, while Fannie Mae (NYSE:FNM) was 14% lower. Other sectors that struggled today included forest products, diversified banks, education services and automobile manufacturers.

The market was still in the process of digesting Tuesday’s stock market rally and the FOMC statement that accompanied a decision to not change the Fed funds interest rate. In a research report, Goldman Sachs said, “The FOMC meeting was largely as expected – with only Fisher dissenting – and a statement that looks relatively balanced between growth and inflation risks (with a modest dovish tilt). We still think the market is wrong to be pricing a significant chance of a hike at the November meeting. Overall, markets continue to trade in a way consistent with global cyclical slowing. Not only have cyclical equities been under persistent pressure over the last few months, but overseas rate markets have been rallying and the commodity pullback is consistent with softer global demand.”

Looking ahead to Thursday’s trading session, the market will get a glimpse of weekly unemployment claims in front of the opening. The claims data used to be a minor blip on the risk radar screen, but has picked up in importance lately amid rising unemployment numbers in the United States.

Individual small caps on the move included InfoSpace Inc. (Nasdaq:INSP), which rallied 21% on strong earnings results. Cavium Networks Inc. (Nasdaq:CAVM), jumped almost 21% on news that the firm has completed a purchase of a Taiwan semiconductor company. CAVM has been struggling of late, setting fresh move lows Tuesday. Greenfield Online Inc. (Nasdaq:SRVY) surged 20% on news that the firm has been approached to be acquired for $17.50 a share. On the downside, Multi-Fineline Electronics (Nasdaq:MFLX) tumbled 34%, gapping lower on sloppy earnings news.