Best election day rally since 1984 as energy soars 10%
Small-cap stocks pushed higher on election day, lifted by strong commodity and financial stocks and relief that a long, yet historic political campaign was about over. The Russell 2000 (NYSE:IWM) closed up 7.47, or 1.39% at 545.97, the sixth consecutive daily gain, something that hasn’t happened all year. For 2008, the Russell is down 29%, while the Dow is off 27% and the S&P 500 is down 31%.
Today’s rally clearly favored large caps as investors still have a tinge of risk aversion that tends to favor bigger companies. Also, the rally in energy stocks had a more powerful influence on large caps as many energy companies have sizable market caps. For large caps, it ranked as the biggest election day rally since 1984 when incumbent Ronald Reagan carried 49 of 50 states, with runner-up Walter Mondale carrying only his home state of Minnesota and the District of Columbia.
Within the energy arena, the Energy Select Sector SPDR Fund jumped 6.3%, mirroring a big surge in crude oil prices. Crude gushed 10% on talk that Saudi Arabia was slashing production. In addition, commodities like crude oil benefited from a sizable slide in the U.S. dollar, which makes dollar-priced goods more attractive. The greenback tumbled more than 300 basis points, or some 2.4% against the euro, triggering a buying spree in all sorts of commodity goods.
The Commodity Research Bureau Index of 19 physical markets shot 5.3% higher today, with gains seen in everything from gold, sugar, coffee, grains, cattle and copper. The latter is seen as a key economic benchmark and copper prices jumped 6.4% in U.S. trading. In addition to the macro trends on the dollar, strong earnings for soybean processor Archer Daniels Midland Co. (NYSE:ADM) fueled a supportive tone for beaten down commodity stocks. ADM shares rallied some 14%.
Financial shares also were a big part of the story today, with the Financial Select Sector SPDR Fund up 5%, boosted by yet another decline for inter-bank lending rates, which are now at levels below what was seen before the stock market crash began in September. The slide for inter-bank rates has been seen as an important signal that the frozen credit situation is thawing and that banks are more comfortable opening credit lines. Citigroup Inc. (NYSE:C) rallied 5%, Wells Fargo & Co. (NYSE:WFC) was up 3.4% and several banks were prominent on the list of big percentage gainers through the small- and mid-cap universe as well. Bellwether stock General Electric Co. (NYSE:GE) climbed 8.7% today on reports that the Treasury Department would consider using some of the $700 billion in rescue funds for corporate financing arms, such as GE Capital’s unit.
It will be interesting to see how the market responds to the final vote tallies later this evening. The market appears to have built in an expectation that front-runner Barack Obama would win the White House, but many are also watching how the open House and Senate seats vote to see if the Democrats increase their power base into a new presidential era.
As traders paid more attention to exit polls than market action, another downbeat reading on economic activity this morning was shrugged off relatively quickly. The factory orders report – which seldom is a big market mover anyhow – missed the forecast with a decline of 2.5% and underscored the awful release Monday from the ISM Manufacturing Survey. However, data reflecting a recession in the manufacturing arena isn’t surprising to the market at this stage. As we progress through the week, it will be interesting to see if the data starts to take on a bigger role ahead of Friday’s big employment report. Even before then, the market will get the ADP Employment Survey Wednesday morning before the open, as well as the ISM Non-Manufacturing Survey shortly after the open.
While energy gains may have been more prominent in large caps today, there were still energy-themed small caps of note as well, including EnergySolutions Inc. (NYSE:ES), which jumped 26% to close above the 20-day moving average for the first time since July. EnerNOC Inc. (Nasdaq:ENOC) rallied 25%. Other small caps on the move included Magna Entertainment Corp. (Nasdaq:MECA) released a statement that they were unaware of any specific developments that would power a recent surge in the stock price. Magna is the largest operator of horse racetracks in North America and also operates casinos in conjunction with the horse racing facilities. MECA stock has gone from $1.40 to a peak of $4.710 in the last five trading sessions and was up about 14% today.
The Russell stalled upside progress today at a logical point of contention – a resistance zone from 546 up to 551. If the market fails to crack that resistance point quickly then it would bolster the case for a pullback here. A decisive push through 551, and a conversion of 546 into support would suggest that another leg higher is on the way, but there will be some hot money longs looking to take profit here, especially in front of the big jobs report Friday. If small caps start to struggle, initial support is at 526 and 520, but the key test is actually down at 514.50.
Today’s rally clearly favored large caps as investors still have a tinge of risk aversion that tends to favor bigger companies. Also, the rally in energy stocks had a more powerful influence on large caps as many energy companies have sizable market caps. For large caps, it ranked as the biggest election day rally since 1984 when incumbent Ronald Reagan carried 49 of 50 states, with runner-up Walter Mondale carrying only his home state of Minnesota and the District of Columbia.
Within the energy arena, the Energy Select Sector SPDR Fund jumped 6.3%, mirroring a big surge in crude oil prices. Crude gushed 10% on talk that Saudi Arabia was slashing production. In addition, commodities like crude oil benefited from a sizable slide in the U.S. dollar, which makes dollar-priced goods more attractive. The greenback tumbled more than 300 basis points, or some 2.4% against the euro, triggering a buying spree in all sorts of commodity goods.
The Commodity Research Bureau Index of 19 physical markets shot 5.3% higher today, with gains seen in everything from gold, sugar, coffee, grains, cattle and copper. The latter is seen as a key economic benchmark and copper prices jumped 6.4% in U.S. trading. In addition to the macro trends on the dollar, strong earnings for soybean processor Archer Daniels Midland Co. (NYSE:ADM) fueled a supportive tone for beaten down commodity stocks. ADM shares rallied some 14%.
Financial shares also were a big part of the story today, with the Financial Select Sector SPDR Fund up 5%, boosted by yet another decline for inter-bank lending rates, which are now at levels below what was seen before the stock market crash began in September. The slide for inter-bank rates has been seen as an important signal that the frozen credit situation is thawing and that banks are more comfortable opening credit lines. Citigroup Inc. (NYSE:C) rallied 5%, Wells Fargo & Co. (NYSE:WFC) was up 3.4% and several banks were prominent on the list of big percentage gainers through the small- and mid-cap universe as well. Bellwether stock General Electric Co. (NYSE:GE) climbed 8.7% today on reports that the Treasury Department would consider using some of the $700 billion in rescue funds for corporate financing arms, such as GE Capital’s unit.
It will be interesting to see how the market responds to the final vote tallies later this evening. The market appears to have built in an expectation that front-runner Barack Obama would win the White House, but many are also watching how the open House and Senate seats vote to see if the Democrats increase their power base into a new presidential era.
As traders paid more attention to exit polls than market action, another downbeat reading on economic activity this morning was shrugged off relatively quickly. The factory orders report – which seldom is a big market mover anyhow – missed the forecast with a decline of 2.5% and underscored the awful release Monday from the ISM Manufacturing Survey. However, data reflecting a recession in the manufacturing arena isn’t surprising to the market at this stage. As we progress through the week, it will be interesting to see if the data starts to take on a bigger role ahead of Friday’s big employment report. Even before then, the market will get the ADP Employment Survey Wednesday morning before the open, as well as the ISM Non-Manufacturing Survey shortly after the open.
While energy gains may have been more prominent in large caps today, there were still energy-themed small caps of note as well, including EnergySolutions Inc. (NYSE:ES), which jumped 26% to close above the 20-day moving average for the first time since July. EnerNOC Inc. (Nasdaq:ENOC) rallied 25%. Other small caps on the move included Magna Entertainment Corp. (Nasdaq:MECA) released a statement that they were unaware of any specific developments that would power a recent surge in the stock price. Magna is the largest operator of horse racetracks in North America and also operates casinos in conjunction with the horse racing facilities. MECA stock has gone from $1.40 to a peak of $4.710 in the last five trading sessions and was up about 14% today.
The Russell stalled upside progress today at a logical point of contention – a resistance zone from 546 up to 551. If the market fails to crack that resistance point quickly then it would bolster the case for a pullback here. A decisive push through 551, and a conversion of 546 into support would suggest that another leg higher is on the way, but there will be some hot money longs looking to take profit here, especially in front of the big jobs report Friday. If small caps start to struggle, initial support is at 526 and 520, but the key test is actually down at 514.50.
About the Author
Kevin Pendley covers the Russell 2000 index for SmallCapInvestor.com and writes a weekly technical analysis column.
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