October going out like a lamb as bargain hunters swoop in

Kevin Pendley | Oct 31, 2008 12:30pm EDT | Comment

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Small-cap stocks staged an impressive rally into midday trading, bolstered by signs of thawing in the credit market freeze, month-end bargain hunting and a renewed appetite for riskier market bets amid hope that the October collapse in equities has already priced in the worst of the economic news. At 12:20 p.m. ET, the Russell 2000 (NYSE:IWM) was up 13.14, or 2.56%, at 527.32, on target for a fourth consecutive daily gain, something that hasn’t happened in five months.

Speaking of riskier bets, the top performing broad market sector so far today has been casinos, followed up by homebuilders, semiconductor equipment, airlines, insurance brokers, construction materials, wireless telecoms and health care services. On the downside, photo products, hotels, agriculture products, metal and mining stocks and gold shares were out of favor.

Inter-bank lending rates have tumbled to the 3% zone, down some 14 consecutive trading sessions, and well off the peak above 5% at the beginning of October when mistrust and fear spiked up lending rates among banks as the credit crisis fueled a run of disasters among large financial companies. During today’s rally, financial stocks were doing well, with the Financial Select Sector SPDR Fund up 2.7%.

Energy and commodity shares were a drag on the market, with the Energy Select Sector SPDR Fund down 0.3% while crude oil prices edged lower on concerns about the demand picture amid a global economic slowdown. The commodity story also was pulled down today by a resurgent U.S. dollar, with the greenback up 1.3% against the euro.

A bevy of economic reports this morning were basically in line with expectations, save for a dour reading on Midwest manufacturing seen in the Chicago purchasing manager’s survey, which tumbled to 37.8, way below the forecast of 48.3. Other reports on personal income, the employment cost index and consumer sentiment were rather tame and clearly overshadowed by enthusiasm that October is coming to an end. Looking ahead to next week, the market will get a douse of several key economic indicators, including the big employment report a week from today. On the radar screen for this afternoon’s trading is an appearance by Federal Reserve Chairman Ben Bernanke, who will talk about the mortgage market and the economy. Highlights from his speech should come out around 2:00 p.m. ET.

Individual small caps of note today include SM&A (Nasdaq:WINS), which will be acquired by Odyssey Investment Partners for $6.25 a share. The news sparked a 132% rally for WINS on unusually heavy volume as the market catches up with the purchase price. China Eastern Airlines Corp. Ltd. (NYSE:CEA), gapped higher and soared 27%. Also on the airlines front, US Airways Group Inc. (NYSE:LCC) rallied 11% and hit the highest price since March. Idenix Pharmaceuticals Inc. (Nasdaq:IDIX) jumped 27% as the biopharma firm reported earnings.