Modest rise as M&A talk, firm dollar counter rising crude

Kevin Pendley | May 22, 2008 10:05am EDT | Comment

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Small-cap shares opened flat and then edged higher, underpinned by news of a big-cap energy acquisition, a firm tone in the dollar, and ideas that Wednesday’s post-FOMC minutes slide was overdone. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) was up 2.46, or 0.34%, at 729.56.

News that NRG Energy (NYSE:NRG) tendered a bid to buy Calpine Corp. (NYSE:CPN) for a stock deal worth $11 billion injected some enthusiasm back into the M&A picture this morning, and played a supportive role in market psychology. Calpine shares were up 7.1% shortly after the opening on the news. If there are large-cap merger deals to be done, then there are certainly bargains to be had within small caps.

There are several apparel retailers coming out with earnings today, which could ripple through the markets. Children’s Place Retail Stores (Nasdaq:PLCE), which is right on the upper end of small-cap market capitalization, reported solid quarterly results this morning and the stock was up 6.2% right after the open.

Large caps in the news early today include Pfizer Inc. (NYSE:PFE), which tumbled 1% on the opening on news that its anti-smoking drug had serious side effects. Also, NetApp Inc. (Nasdaq:NTAP) tumbled 5.7% as the company’s forward projections disappointed.

Crude oil prices shot above $135 dollars a barrel overnight, and continue to be a drag on the both the consumer pocketbook and the cost structure for corporations (just ask the battered airline industry). Goldman Sachs technical analyst Kevin Edgeley said in a research report overnight that crude oil momentum and trend strength are pointing higher, and that there is a long-term channel extension target for crude at $142.90. If crude oil were to close lower today, and well off that $135 record overnight peak, it could generate a topping reversal on charts, and is worth watching during the U.S. trading session.

Despite the jump in crude oil, the dollar was actually higher this morning against the euro, rising about 0.3% into the U.S. stock market open. In addition, the dollar was up about 0.6% versus the yen. The dollar took a big hit yesterday against the euro, sinking to three-week lows. In general terms these days, lower dollar values are seen as a pressuring impact on equities and a supportive element for energy and other commodities.

The weekly unemployment claims report came in this morning before the opening at 365,000, which was better than the forecast, but continuing claims remain on the updraft, which raises concerns about hiring demand.

Among broad market sectors, home furnishings, fertilizer, metals/mining, biotech and refining shares were on the upside. Sellers were drawn early to automobile manufacturers, employment services, tire/rubber and photo product shares.

Individual small-cap stocks of note attracting buyers this morning included Credo Petroleum Corp. (Nasdaq:CRED), which jumped 21%, extending the big move from Wednesday. The stock has basically doubled in the past two weeks. VNUS Medical Technologies (Nasdaq:VNUS) rallied about 10% early, gapping higher without and apparent fresh news to power the move.

On the downside, Blue Coat Systems Inc. (Nasdaq:BCSI) tumbled nearly 24%, gapping lower on sloppy earnings news. Molecular Insight Pharmaceuticals (Nasdaq:MIPI) was down about 9% without fresh news.

Small caps slated to release earnings later today include Pacific Sunwear California (Nasdaq:PSUN), Zumiez Inc. (Nasdaq:ZUMZ), Black Box Corp. (Nasdaq:BBOX), Aruba Networks (Nasdaq:ARUN), Met Pro Corp. (NYSE:MPR), DiTech Networks (Nasdaq:DITC), UQM Technologies (AMEX:UQM) and Linktone Ltd. (Nasdaq:LTON).

It will be interesting to see how the chart patterns develop today. The market fell hard Wednesday after the FOMC minutes, leaving yet another topping pattern in play on daily studies. In addition, the Russell 2000 closed near the 20-day moving average, and decisive action back below that trend indicator line the next couple of days could stir fresh selling. The market closed below opening levels for the fourth consecutive session yesterday, which is a fairly rare flexing of muscles by the bears. As the day progresses, resistance for the Russell comes in at 732.50, 735 and then a vacuum up to 744. Meanwhile, support is pegged at 720.50, then down at 712.50.