Another up day for small caps on credit rescue optimism

Kevin Pendley | Nov 25, 2008 4:30pm EST | Comment

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Small-cap stocks had an up and down session Tuesday, but in the end the bulls won the skirmish. Support from new government credit rescue plans was juxtaposed against soft economic news, weak tech stocks and a market that may have been ready for a breather after two days of manic gains. The Russell 2000 (NYSE:IWM) was up 6.39, or 1.46%, at 443.18 and is now down 42% for the year. The Dow and S&P 500 lagged gains in small caps, but also closed higher and are now down 36% and 42% for 2008, respectively.

Technology stocks were a drag on the market today, as the tech-laden Nasdaq-100 persistently underperformed the rest of the market and shed 1% on the day. Bellwether tech stocks such as Hewlett-Packard Co. (NYSE:HPQ), Cisco Systems Inc. (Nasdaq:CSCO) and Research in Motion Ltd. (Nasdaq:RIMM) took a hit, with HPQ down 5.8%, CSCO off 5.9% and RIMM down 8.3%. Analyst downgrades and worries about spending for technology in a difficult global environment seemed to counter optimism about the new credit facilities throughout much of the day.

The market started out on a positive tone Tuesday, as the government unveiled plans to open credit facilities for mortgage debt and asset-backed consumer products such as student loans, car loans and credit card products, which is hoped will further spark lending interest and help pull the economy out of the doldrums.

Speaking of the economy, the latest read on third-quarter GDP came out today, and as expected the U.S. economy contracted by 0.5%, a sobering thought considering most market watchers expect things to get quite a bit worse in the fourth quarter. Another contraction in GDP in the final quarter of the year would be enough for an “official” recession label, but many argue that we’ve been in a recession for several months already. In addition to the GDP report, a report on housing showed that home prices generated the largest decline on a year-over-year basis on record, but a reading on consumer confidence actually came in above the forecast, a mild upbeat note heading into the big “Black Friday” shopping bonanza in the United States.

The U.S. dollar took a hit versus the euro today, slipping about 0.8%, which should have helped support commodities. But the commodity all of us watch the most – crude oil – actually took a dive today, tumbling $3.7 a barrel, or about 6.8%. Despite the retreat on physical energy prices, energy stocks still managed to push higher today, and actually outpaced the broad market indices.

One of the curious elements in play today for the market was that yields on Treasury instruments fell hard, even though the stock market spent much of the day in positive territory. A record supply of five-year notes was gobbled up by investors, showing that demand for low-risk, low-return outlets remains keen.

Individual small caps on the move today included Talbots Inc. (NYSE:TLB), which rallied 15% as the women’s clothing retailer found access to credit lines from Japanese banks. Also, UAL Corp. (Nasdaq:UAUA) jumped 24%, gapping higher amid a pullback in energy prices today and news that the airline reached a new deal with its largest credit card processor, effectively suspending a requirement on maintaining additional cash reserves.

On the downside, TreeHouse Foods Inc. (NYSE:THS) tumbled some 15% as the food maker and pickle manufacturer received an analyst downgrade. Dycom Industries Inc. (NYSE:DY) fell 24% as the specialty construction contractor posted soft earnings.

Looking at the chart picture, the market looks a tad heavy with today’s stall at the highs, but a consolidation wasn’t really a surprise following extreme gains Friday and Monday. There is still a nice bullish reversal on daily charts off Friday’s lows, but similar patterns failed to yield a true bottom for the bear market on three previous occasions, so caution is still in play. Looking ahead to Wednesday’s session, the market will get a smorgasbord of economic reports, including personal income, durable goods, weekly claims, data on Midwest manufacturing, new home sales and consumer sentiment. In addition, derivatives trading on foreign exchange and interest rate markets will close early for the Thanksgiving Day holiday, which could sap some liquidity out of the afternoon stock market trade.