Decent rise despite jobs gloom

Kevin Pendley | Nov 07, 2008 4:28pm EST | Comment

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Small-cap stocks pushed higher Friday, shrugging off dreadful data on the nation’s employment picture as investors focused on finding bargains amid oversold conditions and amid hope that the worst of the economic numbers — which are likely still on the horizon — have already been factored into the decline. The Russell 2000 (NYSE:IWM) closed up 9.95, or 2.01% at 505.79 and is now down 34% for the year. Meanwhile, the Dow is off 33% in 2008 and the S&P 500 is down 37%.

Small-cap stocks lagged the advance today versus large caps, which hints that investors might have been shopping for bargains but they weren’t willing to be overly aggressive on the risk side of things. Throughout the slide off the September highs, small caps have consistently lost ground to the Dow, which is consistent with a risk-averse attitude fortified by the collapse. Once the market has convincingly bottomed out for the move, small caps will likely once again take a leadership role in the recovery, but if this week’s economic data is any indicator, that could take some time to play out.

Today’s monthly employment report was expected to be awful, and it delivered the goods. Non-farm payrolls tumbled 240,000 and the previous month’s reports were revised upward significantly, which means even more people lost their jobs late this summer than we expected. Although the payrolls figure was above the pre-release consensus, it was actually lower than some of the “whisper” numbers making the rounds late Thursday, which may have played a role in letting the market shrug off the jobs report as a non-event. Still, the unemployment rate jumped to 6.5%, or the highest level in 14 years, which is a tough statistic to ignore. However, market perceptions also helped fend off that blow as well, as it is well-known that many economists are looking for unemployment to climb into early 2009, reaching perhaps 8% or higher. With the market coming off the largest two-day loss in 21 years and being oversold into the weekend, today’s jobs report – bleak as it was – simply didn’t generate enough shock to extend the recent slide. You still have to wonder if the market is trying to outsmart itself on the data front right now, but traditionally when the market can “fade” a big report it has been a nice sign that other elements are in play.

For today, those elements included a bounce in downtrodden commodity, drug and technology stocks, which paced the rally. The AMEX Pharmaceutical Index rose 4.1%, the tech-laden Nasdaq 100 was up 2.3% and the Energy Select Sector SPDR Fund was up 3.3%. Crude oil prices have been hammered in recent weeks and tumbled to a 19-month low ahead of today’s session, but managed a very modest bounce into the weekend, providing something of a cushion for energy stocks. Agriculture product companies, aluminum and coal stocks also were solid performers today, while financials lagged the overall move. Homebuilders, industrial REITS, wireless telecoms and diversified banks were among the worst performers today.

There was some thought that with the market oversold and the jobs report not completely shocking that the market might be reluctant to press the downside ahead of the weekend and also before an afternoon press conference from President-elect Obama, which spent the day talking with economic and business experts in Chicago. In the presser, Obama said that the nation is facing its greatest economic challenge of “our lifetime” and that a fiscal stimulus plan is overdue and that an extension of jobless benefits is in order. The market noticeably retreated from the highs once the Obama headlines came out and small caps even briefly slipped into negative territory on the day.

Individual small caps in rally mode Friday included Landamerica Financial Group Inc. (NYSE:LFG) which jumped 85% on news that the firm would be purchased. Fuel Systems Solutions Inc. (Nasdaq:FSYS) rode out the volatile wave in energy markets to a strong third-quarter result and the market embraced their numbers with a 41% rally. World Fuel Services Corp. (NYSE:INT) rallied 27%, gapping higher as the marine, aviation and land fuel product merchant also managed to post impressive earnings figures.

The chart picture for small caps stalled out this week at a logical spot and closed in the lower portion of the range, which is a warning sign that a quick “V”-style bounce is probably not in the works. In essence, the market is now in a range between 550 and 470 and a convincing breakout on either side of that range would be a big deal. For now, the market needs to show that it can convert the “figure” line at 500 into persistent support because active trading below that point would suggest a retest of the lows is in order.