Rally gains steam as financials take flight

Kevin Pendley | Jan 28, 2009 12:40pm EST | Comment

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Small-cap stocks extended the morning rally into mid-session, with financial and bank stocks leading the way as hope swells for the government to sweep losing assets off bank balance sheets. Importantly, the Russell popped above the recent range highs from the Obama inauguration collapse, which could clear the way for a substantial push higher in the days to come. At 12:24 p.m. ET, the Russell 2000 (NYSE:IWM) is up 14.02, or 3.08%, at 469.60.

Financial names dominated upside activity so far today, but the breadth and depth of the advance was fairly impressive, with nearly a dozen S&P sector groups flirting with double digit gains and only a handful down even 1%.

Diversified banks, life health insurers, financial services firms, regional banks and asset management firms were among the top performers on the day. The KBW Banking Index soared some 11%, with JP Morgan Chase and Co. (NYSE:JPM) ranking as the top lift for the Dow. JPM shares were up 8.6%, while Wells Fargo & Co. (NYSE:WFC) was up a whopping 25%.

On the downside today, gold stocks and tobacco companies were lower, with the Gold and Silver Index down 1.6% and group leader Newmont Mining Corp. (NYSE:NEM) off some 4.1%. Energy shares were higher, but noticeably trailing the overall market advance as large stockpiles and soft demand remain a limiting factor for the physical market. Crude oil prices were mildly higher despite another build in the latest weekly inventory report.

Individual small caps seeing unusual volume action today include Sports Properties Acquisition Corp. (AMEX:HMR), which was only up 0.3%, but seeing a volume spike for the day without any apparent fresh news. Keynote Systems Inc. (Nasdaq:KEYN) was up 8.6% as the online data firm rose to the highest point since Nov. 24 amid solid earnings. Orthovita Inc. (Nasdaq:VITA) climbed nearly 15% as the orthopedic biosurgery firm recovered a big chunk of recent declines on heavy turnover.

The upside breach of 466.45, which marked the recent trading range peak from the inauguration collapse, was a significant development for the Russell. Persistent action above 466 would suggest an upside breakout with a pattern objective of 33 handles, near 499. The market still faces the 20-day moving average just above current levels and so far today the rally has been on moderate volume, but the advance/decline ratio is solid and the Dow and S&P 500 are seeing similar upside pattern breakouts. From a short-term perspective, the next resistance zone for the Russell is at 474, then at 481. Meanwhile, if the market starts to wobble this afternoon, then support will be near 458.