Retail, financial, homebuilders lift small caps past weak data

Kevin Pendley | Dec 03, 2008 4:21pm EST | Comment

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Small-cap stocks pushed higher Wednesday, overcoming a glut of gloomy economic reports as investors snapped up bargains on homebuilder, financial and retailer shares. The Russell 2000 (NYSE:IWM) closed up 11.93, or 2.70%, at 453.76. Small caps outperformed the Dow for the day, but still lag the big-cap index for 2008, with the Russell off 41% for the year, while the Dow is down 35%. The S&P 500 is off 41%.

The fact that small caps finished off the day with a positive print is a minor victory for a downtrodden market. Early on today investors were greeted with a larger-than-expected decline on payroll jobs from the ADP Employment Survey and then hit with an unnerving drop in services sector activity in the ISM Non-Manufacturing Survey. The weak economic reports took a toll on prices early, as some traders fretted about Friday’s upcoming employment release.

However, the market rallied into midday trading as a rush for homebuilder stocks paced the comeback move. It should be noted as well that not all of today’s economic numbers were downbeat. In fact, the weekly MBA Mortgage Application index jumped 112% to the highest level since mid-February, sparking some hope that sinking mortgage rates will generate fresh activity in the housing arena.

“The mortgage purchase and refinance data are seen as friendly, and Radian said that October mortgage claims were less than expected,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview. “The idea of cheap gasoline and the potential for refinance activity is helping to stoke interest in homebuilders and retailers. Finally, we’re seeing signs of something that could spark a rally and defaults could ease if people can refinance and pay less for gasoline.”

Speaking of gasoline, crude oil prices slipped $0.17 a barrel to $46.79 and notched 3-1/2-year lows during the U.S. trading session despite a drop in inventory levels. Energy stocks were a drag on stocks for most of the day, and the Energy Select Sector SPDR was basically flat right before the close.

Kalivas said that there also was some chatter about the government tapping into the second portion of TARP funds. True or not, even the thought of more action on that front tends to be supportive to equities – especially in the financial arena. Banks, brokerages and other financial firms were clearly a source of strength for stocks today. The Financial Select Sector SPDR Fund rose some 6% and Citigroup Inc. (NYSE:C) continues to climb out of the abyss, rising another 8% today.

Even though investors might take one look at today’s dreadful ISM report on the services sector which showed record lows, Kalivas said that “some see the ISM number as a cycle low. Yes, the payroll number will be weak, but this type of news is so talked about, it is not a catalyst for new selling.”

When the day started, tech stocks were sinking in Europe and were the dominant bearish influence in play for stock index derivatives in pre-market trading. Across the pond, Infineon, Europe’s second-largest semiconductor maker, fell hard as profits disappointed and then U.S. bellwether Research in Motion Ltd. (Nasdaq:RIMM) cautioned that preliminary results would miss the mark, which fed into the tech woes. However, the tech-laden Nasdaq 100 actually outperformed other indices into the close today, and RIMM even rallied 4%. “I think the fact that RIMM has not traded down on its profit warning sparked short-covering. The stock was already discounting a short fall and is something of a lagging indicator,” Kalivas said.

Looking at individual small caps making a move today, QC Holdings Inc. (Nasdaq:QCCO), jumped 54% on a volume spike without any apparent fresh news from the payday loan firm. Another small firm soaring without news was Intersections Inc. (Nasdaq:INTX), which rallied 48% to the highest close since mid-November. Polypore International Inc. (NYSE:PPO) jumped 31% as the lithium-ion battery company announced that one of their subsidiaries received a $2.3-million contract. On the downside, WuXi PharmaTech Inc. (NYSE:WX) slumped 18% as the pharma bio-tech firm with operations in the United States and China said Tuesday that its U.S.-based biologics manufacturing will be discontinued.

The chart picture has a moderate short-term bullish slant within the long-term massive bear market collapse and needs to break free of either last week’s high or this week’s low to truly spark a noteworthy breakout move. Looking ahead to Thursday’s action, the market will get a chance to react to weekly unemployment claims, which often attract heightened interest the day before the monthly jobs release. In addition, factory orders come out and there are quite a few Federal Reserve officials out on the speaking circuit.