Tepid rise as small-caps, techs lag big bank rally

Kevin Pendley | Oct 14, 2008 10:00am EDT | Comment

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Small-cap stocks shot higher on the opening, extending Monday’s rise on news that the U.S. government will plow some $250 billion in taxpayer funds directly toward stock purchases of major banks. At 9:55 a.m. ET, the Russell 2000 (NYSE:IWM) was up 1.79, or 0.31%, at 572.68. Tech stocks were lagging the early rally, as were small caps, as the focal point of the move was on big banks.

The U.S. announcement follows news from the United Kingdom, France and Germany of similar plans to buy equity in banking institutions and the U.S. plan includes a three-year guarantee on bank loans. Financial firms took flight early today on the news, with Citigroup Inc. (NYSE:C) up 18% and Bank of America Corp. (NYSE:BAC) up 18%.

Looking at money flow this morning, Treasury markets were falling hard as the safe-haven push dulled amid strong gains in equities. The yield on benchmark 10-year notes (which moves inversely to price) was up some 3.3%. The market has been fixated on interbank lending rates, which were stuck at extreme levels despite central bank rate cuts, but those rates posted their biggest decline of the year overnight in response to the steps taken around the world to restore confidence to banks — including measures to guarantee interbank loans.

Crude oil prices were higher this morning, which should help support energy shares. The energy market continues to track movement in stocks, gaining hope that the recent recovery rally will soften the demand blow to crude from difficult economic conditions. Although the focus is firmly on stocks and the financial sector early this week, the market will receive data on inflation figures Wednesday and Thursday.

Outside of the financial sector, earnings came out this morning for Johnson and Johnson (NYSE:JNJ) and the consumer products firm topped the forecast, helping to generate a 5% rally in JNJ shares on the open. Pepsico Inc. (NYSE:PEP) also released results today, but missed the estimate and the stock was off 10% early today.

Individual small caps on the move this morning were highlighted by Broadwind Energy Inc. (OBB:BWEN), which saw its market cap move from the small-cap to mid-cap range as the stock soared some 103% on a huge gap move. Nicholas-Applegate Equity & Convertible Income Fund (NYSE:NIE), jumped some 65%. Layne Christensen Co. (Nasdaq:LAYN) rallied 36% and continues to build on the rally built off move lows from Friday. On the downside, Maiden Holdings Ltd. (Nasdaq:MHLD) was off about 11%, giving back a chunk of Monday’s big rally.

The chart structure for the Russell is in a sharp “V” bounce correction, and the odds for this sharp bounce were heightened by the stunning speed of the decline. Still, it would take a rally back through 649 to suggest that the lows are truly in place. From a short-term standpoint today, resistance is at 591 and the “figure” at 600. If the market starts to wobble, look for support 577, 566 and 550.