Three-month highs set as M&A news counters firm commodities

Kevin Pendley | Apr 28, 2008 4:27pm EDT | Comment

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Small-cap stocks pushed higher Monday, climbing to the highest point since early February as news of a large-cap candy merger stoked investor hope that the worst of the credit crunch has been endured. Despite the optimism spurred by renewed merger and acquisition activity, the advance Monday was relatively tame, with the Russell 2000 (NYSE:IWM) gaining 3.49, or 0.48%, to 725.37. In addition, a late profit-taking spree Monday pressed the Russell off intraday highs and pulled the Dow and S&P 500 just slightly in the red.

A bullish tone for Monday’s action was set in motion overnight when Mars Inc. announced plans to acquire Wrigley (NYSE:WWY) for $23 billion, including a $6.5-billion stake financed by Warren Buffet. If the legendary “Oracle of Omaha” was ready to acquire companies in this sluggish economic environment, then it spurred investor hope that the overall stock market might be undervalued. However, in an interview with CNBC, Buffet cautioned that he thought the economic recovery in the United States could be more prolonged than many anticipate.

Perhaps some of the bullish gusto over the rise to three-month highs was tamed by surging commodity prices, which could not only raise input costs for many manufacturing companies, but also could crimp consumer spending habits and prolong the sluggish economy. On the commodities front, crude oil prices notched a fresh record high overnight just shy of $120 dollars a barrel, but the big news during the trading day took place in the grains market, where U.S. corn prices climbed to a record high. In addition, Henry Hub gas prices rose to two-year highs following unseasonably cool weather over the weekend in the Northeast and Midwest and on production outages in the Gulf of Mexico.

Bulls also may have been tiptoeing around the fray because the market is faced with extreme event risk later this week from the economic calendar and from Wednesday afternoon’s FOMC announcement. In fact, a surge to three-month highs in front of several unknowns like GDP, FOMC and employment data could easily attract some profit-taking from short-term longs that have been on board in recent days for the rally.

Still, from a technical analysis standpoint, Monday’s advance was an important achievement on the road to recovery for small-cap stocks. The area just above 724 marked a 38.2% Fibonacci retracement of the entire bear market collapse, and sustained activity above that point would suggest that the rally off the March lows has been more than just corrective in nature. The next two big Fibonacci points are near 750 and 775.

From a short-term standpoint, Monday’s rally lifted the market through recent consolidation highs; the next logical resistance test is at 731, which will mark a double top on daily and weekly charts from the early February highs. Above there, resistance is at 735 and 743. Meanwhile, any pullback Tuesday would have initial support at 724, then at 714.

Within broad market sectors, the best performers came from food distributors, which shot up about 9%, and from health-care facilities, which were up 8%. Automobile manufacturers climbed nearly 7%, lifted by a 9% jump in Ford Motor Co. (NYSE:F), which shot higher following a bid by Kirk Kerkorian’s Tracinda to buy 20 million shares at $8.50 a share (Ford settled last Friday at $7.50 a share). On the sector downside, tires and rubber slipped about 5%, while fertilizer shares were down over 2% and electrical equipment manufacturers were down about 2%.

Within individual small-cap shares, Integral Systems Inc. (Nasdaq:ISYS) jumped over 11% on earnings news. Origin Agritech (Nasdaq:SEED) was up about 7% on heavy volume and no fresh news, while Energy XXI Ltd. (Nasdaq:EXXI) was up over 7% on brisk volume, also without noteworthy news to stoke the move.

On the downside, Radware Ltd. (Nasdaq:RDWR) was off nearly 13%, gapping lower on heavy volume on soft earnings news. First State Bancorporation (Nasdaq:FSNM) was down nearly 15% on weak quarterly results.

Looking ahead to Tuesday’s session, the market gets its first taste of economic news this week from the Consumer Confidence report, which comes out at 10:00 a.m. ET. In the wake of a 26-year low last week on the Michigan consumer sentiment survey, it will be interesting to see the Conference Board’s take on the prevailing mood. However, the report simply sets the stage for a run of much bigger data to come, including Wednesday’s GDP report, which is the first piece of official “recession question” data.