Small caps reverse direction; shrug off bad econ data

Kevin Pendley | Dec 03, 2008 12:36pm EST | Comment

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Small-cap stocks reversed course, putting a brief but sharp morning slide on awful economic data in the rear-view mirror as investors gobbled up homebuilding, retail and financial shares and set aside any economic worries stirred by sobering private employment and services sector activity reports. At 12:26 p.m. ET, the Russell 2000 (NYSE:IWM) was up 4.75, or 1.07% at 446.57.

Small caps were leading the way on the midday surge, which suggests that investors were willing to take on a more aggressive posture and not just sit on defensive, low-risk plays. Along that theme, yields on Treasury products were higher as demand clearly was more focused on riskier fare today.

The ability to rally in the face of a bad reading on the ADP Employment Survey ahead of Friday’s big monthly employment report was a positive sign for the market. In addition, the ISM non-manufacturing survey came in well below the forecast, showing the services sector of the economy is mired deep in recession.

Homebuilder stocks were in rally mode Tuesday and remained a hot item today. The ISE Homebuilders Index jumped 10% and small-cap homebuilders were among the best performers in the group. Centex Corp. (NYSE:CTX) was a star Tuesday and jumped another 12% today. Meanwhile, Lennar Corp. (NYSE:LEN) was up 8% and KB Home (NYSE:KBH) soared 16%. Homebuilder shares appear to be attracting bargain hunters amid sentiment that the government’s new focus on lowering long-term and mortgage rates will spur renewed activity in the housing sector and generate fresh refinancing at lower interest rates. President-elect Obama said today that homeowners inability to pay mortgages is a key part of the recession.

Obama also said that automakers appear to be formulating “more serious” business models to help justify a government bailout of the ailing sector. Ford Motor Co. (NYSE:F) was up 5%, but General Motors Corp. (NYSE:GM) was down about 1.5%.

Crude oil prices stabilized after weekly inventory reports showed a decline in crude oil stockpiles and a drop in refined products. Still, even though crude oil clawed into positive territory at midday, energy stocks were still a drag on the market, with the Energy Select Sector SPDR Fund off about 0.5%.

Individual small caps on the move outside of homebuilders included Loral Space and Communications Inc. (Nasdaq:LORL), which rallied 39% amid a dearth of news. Forest City Enterprises Inc. (NYSE:FCE.B) jumped 26% as the commercial property firm benefited from the bounce in homebuilder and REITS. Grey Wolf Inc. (AMEX:GW) rose 23% as the oil and gas driller announced a merger deal with Precision Drilling Trust. Orthofix International NV (Nasdaq:OFIX) climbed 21% on news that a large owner in the firm is pushing for the company to call a special shareholder meeting and sell a medical business unit and reduce corporate overhead. On the downside, Alpha Natural Resources Inc. (NYSE:ANR) fell 14% as the coal miner revised guidance.