Two steps back, one step forward for small caps

Kevin Pendley | Dec 02, 2008 4:26pm EST | Comment

Rating: Unrated [rate it]

Small-cap stocks staged a solid recovery rally Tuesday, recovering a hefty slice of the historic collapse from Monday’s freefall but remaining in the shadow of that epic decline. Strength today stemmed from short-term oversold conditions, hope for a rescue bail-out of automakers as well as bargain hunting in financial and homebuilder shares. The Russell 2000 (NYSE:IWM) closed up 24.75, or 5.93%, at 441.82. The Russell is now down 42% for 2008, while the Dow is off 37% and the S&P 500 is down 42%.

Optimism for a $25 billion aid package for embattled U.S. carmakers may have played a supportive role in the action today, but stock in General Motors Corp. (NYSE:GM) came tumbling down from a steep morning rally after word got out that November vehicle sales collapsed 41.3% versus the same month last year. Executives from the Big 3 automakers submitted plans to Congress for the bail-out proposal. Ford Motor Co. (NYSE:F) was the first to release their plan, which called for a $9 billion loan, no executive bonuses, a reduction in dealers and new plans for electric cars. Into the close, GM shares were up slightly, while Ford was up about 4%.

Financial stocks were among the top performers today, with the Financial Select Sector SPDR Fund up 5%, including another sizable rise in Citigroup Inc. (NYSE:C), which was up 9%. Smaller banks and financial firms dominated the best percentage movers as well.

Homebuilder shares were surprisingly stout, with the ISE Homebuilder Index climbing 7.5%. Within the small-cap universe, KB Home (NYSE:KBH) jumped 9.5%, Lennar Corp. (NYSE:LEN) rallied 14.1% and Centex Corp. (NYSE:CTX) rose 11.5%. Perhaps the group was simply oversold, and perhaps some of the move was tied to hopes that further rate cuts and the government’s new push on lowering longer-dated debt rates would revive the sagging housing industry. On Monday, Federal Reserve Chairman Ben Bernanke intimated that the Fed could purchase long-term products and that sentiment was echoed today by Philadelphia Federal Reserve Bank President Charles Plosser, who said that the Fed certainly can buy Treasury products and that it was “not unreasonable” to describe the Fed’s balance sheet expansion as a form of “quantitative easing.”

Drug stocks, banks, airlines and insurance companies also were strong performers today. Several noteworthy airline companies fall into the small-cap universe, including US Airways Group Inc. (NYSE:LCC), which soared nearly 15%. Alaska Air Group Inc. (NYSE:ALK) took flight as well, climbing 8% and UAL Corp. (Nasdaq:UAUA) was up about 5%. Airlines no doubt benefited from a rally in the overall stock market and also a drop in energy prices.

Crude oil futures stumbled through the afternoon Tuesday, as support from the bounce in equities was not enough to quell concerns about the demand picture amid a global recession and OPEC’s decision not to trim output just yet. Crude oil prices fell $2.32 a barrel, or 4.7% to $46.96. The sloppy tone in cash energy prices weighed on energy shares, which trimmed away morning gains but bounced back somewhat late in the day after energy futures had already closed.

Beyond the homebuilder and airline stocks already mentioned, Future Canada China Environment Inc. (OBB:FCCE) jumped 50%, but the move took place on very light volume and this unknown entity has suddenly stormed to $15 a share after debuting in mid-October as a nickel stock. Standard Register (NYSE:SR) jumped 28% as the document services provider mounted a nice big bounce off Monday’s slide. On the downside, Sierra Wireless Inc. (Nasdaq:SWIR) tumbled 27% on unusually heavy volume on news that the Canadian provider of mobile modems plans to buy French wireless tech company Wavecom.

Today’s recovery rally in the Russell was basically an inside session bounce on modest volume amid oversold conditions and therefore lacks punch. The market needs to climb back above last week’s highs without breaching today’s lows to truly add some power to any recovery move. There is still mild chart support below this week’s lows along 406.50 and the “figure” point at 400, but any action below 400 would strengthen the case for a retest of the bear market lows. A rally back above 491 is needed to break the recent cycle of lower lows and lower highs and provide more salt to any bottoming theories. Looking ahead to Wednesday’s session, the market will get a glimpse of the ADP Employment Survey in the morning, which could provide some trading clues into Friday’s big monthly employment release. Productivity, the ISM Non-Manufacturing Survey, Beige Book and a couple of Federal Reserve speakers are also on the docket, making for a busy day.