Energy stocks fuel rally off new lows

Kevin Pendley | Nov 13, 2008 4:32pm EST | Comment

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Small-cap stocks took flight this afternoon, spurning fresh bear market lows as bargain-hunters swooped in to snatch up deals, especially in the oversold and downtrodden commodities arena. The market once again showed a willingness to look past dreary employment data, seeing bad news on that score as Wednesday’s worries. The Russell 2000 (NYSE:IWM) closed up 38.41, or 8.48%, at 491.20. For the year, the Russell is down 36%, while the Dow is off 33% and the S&P 500 is down 38%

The weekly unemployment claims report this morning showed that the number of Americans filing continuing claims is at the highest point in 25 years, and just the latest weekly figure alone was the highest since September 2001. Still, the market barely budged when those figures came out, even though they were worse than expected, which created an aura that the jobs numbers weren’t behind market actions today. Even when the market crumbled in the afternoon and sank to new lows, you could tell there was more to the story than just worries about the jobs picture.

Coming into this morning’s activity, investors also had to weigh a revenue warning from technology bellwether Intel Corp. (Nasdaq:INTC); solid quarterly profits, but a mixed outlook from the world’s largest retailer, Wal-Mart Stores Inc. (NYSE:WMT); another wave of selling in overseas markets; a rise in bank lending rates for the first time in a month; the first German recession in five years; and a dip in crude oil prices to 22-month lows before an afternoon snap-back bounce in concert with equities.

“I think selling was related to the lift in Libor rates, poor earnings at Intel, weak guidance from Wal-Mart and ongoing disappointment over the TARP,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview. “There have also been rumors that GE’s dividend may be cut. When the market started to rally back, I think sellers did not want to press in front of the G-20 meeting, insider buying at GE was announced and the earlier selling in stocks was not confirmed by outside market action.”

The market appears preoccupied with finding a bottom for the collapse, which is understandable because the risk is obviously much less near the lows. The pace of market declines has now shifted into a grueling slow-torture process, especially compared with the breakneck speed of the September-October collapse, which had many hoping for a quick, “v”-style rally away from the lows, which just hasn’t happened yet.

“I think the best bottom story rests in the fact that news flow is so bad and INTC could not breach its 2001 low on the earnings warning,” Kalivas said. “In my book, the market will have trouble sustaining a major rally until the auto sector issues are resolved. I also think the fact that the Treasury will no longer buy bad bank assets will prolong the credit crunch. To that end, the breakdown in the banking index is a negative sign. I’d like to see better price action in the banks and retailers before calling a bottom. The market is at a pivotal point and I could see prices either up or down 1,000 Dow points from here this time next week,” he said.

A big part of the recovery rally today was fueled by a pop in commodities, with crude oil reversing overnight weakness to gain $2.08 a barrel, or 3.7% on the day. Looking at sector activity today, commodity themes were prevalent, with coal, metals and mining stocks among the best performers, while the Energy SPDR Fund surged some 9%. It should be noted that commodity markets have been hammered in historic fashion in recent weeks, so they are oversold and ripe for a correction.

Looking ahead to Friday’s session, the market will get a chance to respond to retail sales data, which could provide a critical glimpse heading into the key holiday season. Consumer spending in September slipped for the first time in 17 years, a troubling development for an economy that is two-thirds driven by spending. In addition, traders continue to watch for signs from the hedge fund industry about redemptions and hedge fund leaders were in front of Congress today to talk about systemic risk and oversight issues.

“Lots of people are talking about hedge fund redemption notices at year end. The 45-day notice period is this weekend. If there is not heavy selling early next week, some buyers may appear,” Kalivas said. He also said that the market is watching what happens from here with dividends. “This is a big issue. I think there is a feeling that the government injection of capital will lead many financial firms to cut dividends. Dividends are one reason to be long stocks here,” he said.

Individual small caps in rally mode today included AMAG Pharmaceuticals Inc. (Nasdaq:AMAG), which soared 90%, gapping higher on a tremendous volume spike on news that the FDA accepted its anemia drug response. CB Richard Ellis Group Inc. (NYSE:CBG) rose 40% as the world’s largest real estate services firm bounces back after taking a hit earlier this week on news it would roll out a public offering. Global Sources Ltd. (Nasdaq:GSOL) jumped 37% as the B-to-B media company and China trade facilitator reported earnings.

“Today’s close will be watched closely by technicians. Getting a new low and a higher close will cause some chart watchers to think that the market has reversed and may lend some confidence to the bull picture,” Kalivas said.

Speaking of technicals, from a charting pattern standpoint, the symmetry of recent moves borders on eerie. Back on Oct. 10, the Russell made new move lows with a bullish reversal. Then, 12 sessions later on Oct. 28, the Russell made new move lows, once again with a bullish reversal. Now, 12 sessions later, the Russell once made new move lows, and again with a bullish reversal. While all of that might sound like nothing but a very odd data quirk, there is a pattern in the process that is bearish … we are in a cycle of making new lows, then seeing the corrective bounce off those lows falling short of the old highs. Lower lows and lower highs is classic bear market behavior. Even though today’s bullish key reversal has significant power, it would still greatly enhance the big reversal rally if the market were to climb back above the recent bounce highs just shy of 551.