Stocks extend gains on sudden downward reversal in crude

Small-cap stocks extended the morning rise into mid-session, receiving a boost from a sudden reversal in course on crude oil prices. The day was already off to a solid start when economic data on growth came in above expectations. At 12:50 p.m. ET, the Russell 2000 (NYSE:IWM) was up 6.31, or 0.86%, at 739.26.

The volatile world of energy prices made an about face from morning highs near $120 dollars a barrel, slipping back to the $115 zone on reports that strategic petroleum reserves could be released if Tropical Storm Gustav crashed into key energy production zones in the Gulf of Mexico, stunting supplies out of that key region. Gulf output accounts for some 25% of U.S. crude production and about 15% of natural gas output.

The stock market got things off in rosy fashion this morning when second-quarter GDP came in at 3.3%, which was well above the forecast for a rise of 2.7%. The GDP report became yet another in a string of bullish data surprises this week, following consumer confidence Tuesday and durable goods orders on Wednesday. That said, some of these data series are volatile (durables and confidence) and others are relatively out of date (GDP), so clearly there are other forces at play providing a boost to the stock market.

One of those forces would appear to be month-end short-covering from hedge funds, and that buying interest has been magnified by thin volume conditions ahead of the final big summer holiday weekend in the United States. In addition to the short-covering push, financial stocks appear to be on more stable footing this week, with government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) bouncing on management changes at FNM and on ideas that the mortgage funding giants might not be in as bad a sharp as feared. FNM was up 12% at midday, while FRE was up 11%. Financial stocks in general were up nearly 3% . . .

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