Small caps lead bullish post-FOMC charge after rate stunner
Small-cap stocks stormed higher Tuesday, extending a morning rally when investors got word that the Federal Reserve slashed interest rates to the lowest level in history and hinted that they wouldn’t hesitate to utilize other tactics to help jolt the moribund economy out of one of the worst recessions since the Great Depression of the 1930s. The Russell 2000 (NYSE:IWM) rose 30.28, or 6.69%, to 482.35, the highest daily close since Nov. 13. For the year, the Russell is still down 37%, while the Dow is off 33% and the S&P 500 is down 38%.
The FOMC stunned the market by slashing rates by 75 to 100 basis points, well beyond the 50-bp cut that was expected. Policy makers also made no bones about their mission right now: save the economy, worry about prices later. In fact, the Fed’s own statement said they would “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” With prices sinking as evidenced by today’s CPI report, the clear goal is economic growth. Now that the Fed is basically handing out money free of charge to those with access to the Fed window, the next order of business would appear to be attacking long-term interest rates, either through direct purchases or other means. The action was bold and stock market investors liked the approach.
It will be interesting to see if the heightened focus on long-term rates will provide a spark to the moribund housing market. Housing starts numbers released this morning tumbled to the lowest rate in history and slumped 18.9% on a seasonally adjusted rate. Despite the gloomy picture of the housing market, homebuilder shares took off today, attracting bottom-fishers on hopes that a light at the end of the tunnel will soon be seen – especially with the Fed on the rate prowl. Homebuilder stocks shot higher, climbing some 12%, with small-cap firms such as Lennar Corp. (NYSE:LEN) rising 11% and KB Home (NYSE:KBH) also climbing 11%, while Centex Corp. (NYSE:CTX) jumped 14%.
A clear beneficiary of the aggressive Fed’s tack on rates should be financial companies, and the Financial Select Sector SPDR Fund soared 11%. Former investment banks turned commercial banking entities saw a rush of buyers today as did other banks. JP Morgan Chase and Co. (NYSE:JPM) climbed nearly 13% and Goldman Sachs Group Inc. (NYSE:GS) shot up 14%, even though the latter announced its first quarterly loss since turning public back in 1999.
Speaking of earnings news, Best Buy Co. Inc. (NYSE:BBY) topped the forecast this morning before all of the hoopla over FOMC stoked the bullish fires and simply closed out a very nice day up almost 18%, spreading holiday goodwill throughout not only the retail complex, but also into technology stocks. The S&P Retail Index rose 5.3%, outpacing the day’s gain in the Dow and S&P 500, but not quite keeping up with the Russell.
Individual small caps on the rise today were highlighted by Stratus Properties Inc. (Nasdaq:STRS), which climbed 34% amid the general real estate bull run. Central European Media Enterprises Ltd. (Nasdaq:CETV) rose almost 28% and has rallied to more than $22 a share after slipping to a low in late November of $9. Back to the housing front, MI Homes Inc. (NYSE:MHO) rallied 27% and Meritage Homes Corp. (NYSE:MTH) was up 27% as well. So, with all the bullish tidings in the air today, which firms didn’t perform? Satyam Computer Services Ltd. (NYSE:SAY) collapsed 54% after the Indian software firm announced plans to spend $1.6 billion to buy infrastructure building companies — which investors thought seemed a stretch for a computer software outfit.
Looking at the chart picture for small caps, today’s rise to the highest close in more than four weeks helps validate the bottoming argument, but there is still upside wood to chop. The next key point is at 491, which turned the market down hard last time around. A decisive breach of 491 would mark the first time that the market took out previous correction highs without setting new bear market lows first – an important break away from bearish cycle behavior. To that end, the market has already been trading in a sideways fashion of late, which is a departure from the old manner of quick, failed corrections followed by gut-wrenching collapses.
The FOMC stunned the market by slashing rates by 75 to 100 basis points, well beyond the 50-bp cut that was expected. Policy makers also made no bones about their mission right now: save the economy, worry about prices later. In fact, the Fed’s own statement said they would “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” With prices sinking as evidenced by today’s CPI report, the clear goal is economic growth. Now that the Fed is basically handing out money free of charge to those with access to the Fed window, the next order of business would appear to be attacking long-term interest rates, either through direct purchases or other means. The action was bold and stock market investors liked the approach.
It will be interesting to see if the heightened focus on long-term rates will provide a spark to the moribund housing market. Housing starts numbers released this morning tumbled to the lowest rate in history and slumped 18.9% on a seasonally adjusted rate. Despite the gloomy picture of the housing market, homebuilder shares took off today, attracting bottom-fishers on hopes that a light at the end of the tunnel will soon be seen – especially with the Fed on the rate prowl. Homebuilder stocks shot higher, climbing some 12%, with small-cap firms such as Lennar Corp. (NYSE:LEN) rising 11% and KB Home (NYSE:KBH) also climbing 11%, while Centex Corp. (NYSE:CTX) jumped 14%.
A clear beneficiary of the aggressive Fed’s tack on rates should be financial companies, and the Financial Select Sector SPDR Fund soared 11%. Former investment banks turned commercial banking entities saw a rush of buyers today as did other banks. JP Morgan Chase and Co. (NYSE:JPM) climbed nearly 13% and Goldman Sachs Group Inc. (NYSE:GS) shot up 14%, even though the latter announced its first quarterly loss since turning public back in 1999.
Speaking of earnings news, Best Buy Co. Inc. (NYSE:BBY) topped the forecast this morning before all of the hoopla over FOMC stoked the bullish fires and simply closed out a very nice day up almost 18%, spreading holiday goodwill throughout not only the retail complex, but also into technology stocks. The S&P Retail Index rose 5.3%, outpacing the day’s gain in the Dow and S&P 500, but not quite keeping up with the Russell.
Individual small caps on the rise today were highlighted by Stratus Properties Inc. (Nasdaq:STRS), which climbed 34% amid the general real estate bull run. Central European Media Enterprises Ltd. (Nasdaq:CETV) rose almost 28% and has rallied to more than $22 a share after slipping to a low in late November of $9. Back to the housing front, MI Homes Inc. (NYSE:MHO) rallied 27% and Meritage Homes Corp. (NYSE:MTH) was up 27% as well. So, with all the bullish tidings in the air today, which firms didn’t perform? Satyam Computer Services Ltd. (NYSE:SAY) collapsed 54% after the Indian software firm announced plans to spend $1.6 billion to buy infrastructure building companies — which investors thought seemed a stretch for a computer software outfit.
Looking at the chart picture for small caps, today’s rise to the highest close in more than four weeks helps validate the bottoming argument, but there is still upside wood to chop. The next key point is at 491, which turned the market down hard last time around. A decisive breach of 491 would mark the first time that the market took out previous correction highs without setting new bear market lows first – an important break away from bearish cycle behavior. To that end, the market has already been trading in a sideways fashion of late, which is a departure from the old manner of quick, failed corrections followed by gut-wrenching collapses.
About the Author
Kevin Pendley covers the Russell 2000 index for SmallCapInvestor.com and writes a weekly technical analysis column.
Read More
(click a star)
Enter comment: