Russell climbs to second highest daily close of 2008

Kevin Pendley | Aug 14, 2008 4:38pm EDT | Comment

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Small-cap stocks mounted an impressive rally Thursday, eye-catching not for the severity of the climb, but for the ability to shrug off bearish economic data. Fresh worries about inflation and the jobs picture were fanned this morning, but those issues had a surprisingly short shelf life as investor appetite for riskier investments and the unwinding of long commodity trades continues to bolster equity markets. The Russell 2000 (NYSE:IWM) closed up 6.69, or 0.89%, at 754.38. The Russell is now down just 1.5% for 2008, while the Dow is off 12.3% and the S&P 500 down 11.9%. Very quietly, the Russell 2000 today generated the second highest daily close of the year, which puts all the shorts on a tight equity leash.

Although a big jump in consumer price inflation pulled down the stock market on the opening today, investors quickly set aside the data as “dated,” reasoning that recent sharp declines in the price of energy have not filtered into the official inflation numbers yet. Indeed, on a near-term basis, crude oil prices have collapsed some 21% from the summer peak and were down about $1 dollar a barrel today to $115. However, it was a volatile session for crude oil, as the market did bounce off the intraday low of $112.59 as traders are unsure if a cease-fire order between Russia and Georgia will hold up.

Elsewhere on the commodities front, soft markets were taking a hit today, with cotton down 2.3%, cocoa off 1.5% and sugar down 2.3%. Clearly, commodities are unwinding off a major bullish run and some of that money (most likely flush from big profits) is more than willing to take a stab at the stock market — especially within the small-cap arena. Playing a big role in the unraveling of commodity market inflation has been a dramatic strengthening in the U.S. dollar, which makes many physical goods sold on the world that are priced in dollars more expensive. Look at it this way, crude oil priced in dollar terms is still not extremely cheaper than it was at the highs because the dollar has jumped in value by 7% since mid-July.

Indeed, an impressive part of today’s action was the move in the greenback, which soared some 0.7%, or more than 110 basis points, against the euro — despite the seemingly bearish U.S. economic data. Either the rest of the world has faith that the U.S. economy can see the light at the end of the tunnel, or they are worried that their own economic situation (especially in Europe) is deteriorating in comparison to the United States.

And what about today’s worrisome economic reports? The aforementioned Consumer Price Index came in at 0.8%, which was way above the forecast for a rise of 0.4%, and the year-over-year rise in CPI was at 5.6%, the highest rate in some 17 years. No matter how you try to spin the story, those are not comforting numbers. The only solace is that a big chunk of the rise is attributable to energy and food price inflation and that has been on the mend in recent weeks (the CPI report was for July data).

In addition to the troubling inflation headline number, the weekly claims report came out at 450,000 new jobless filings, which was down from 460,000 last week, but still outpaced the projection of 432,000. Many insiders track the four-week moving average on claims for a smoother read of the trend, and that rose to the highest point in six years. The combination of high inflation and rising unemployment handcuffs monetary policy makers and can lead toward stagflation, which is recession-style growth combined with high prices.

The former legendary head Federal Reserve policy maker himself, Alan Greenspan, told the Wall Street Journal today that the housing market could bottom out in the first half of 2009, which may have been taken as a sign of relief by some market watchers. As an aside, it’s interesting to note that some stock analysts initiated coverage in luxury home builders earlier this week with a “buy” rating. As for Greenspan, he intimated that a bottom in the housing market is actually more critical for financial market stability than it is for homeowners. Without knowing the value of underlying assets, it’s difficult to grasp debt issues for financial firms.

Speaking of financial companies, the market finally stabilized today after one of the worst two-day routs in several years. The Financial Select Sector SPDR was up 2% today, the PHLX KBW Banking Index was up 2.6%, while thrifts and mortgage finance firms were among the top performing sectors on Wall Street. Other solid performing sectors included hotels, homebuilders, construction materials and casinos.

On the flipside, commodity themes were out of favor today with investors, with gold stocks, oil refiners, steel shares, agriculture chemicals, oil drillers, metals and mining all trading lower.

Individual small-cap stocks of note included Avanex Corp. (Nasdaq:AVNXD), which recently announced a reverse split and jumped above the 20-day moving average today for the first time since late June. Fuel Tech Inc. (Nasdaq:FTEK) jumped 15% without any apparent fresh news to gas the move. Landamerica Financial Group Inc. (NYSE:LFG) rallied 13% and is trying to put together a recovery after sinking from $45 in late-March to a low in late July below $10. On the downside, LSI Industries Inc. (Nasdaq:LYTS), gapped lower and tumbled 30% on unusually heavy volume as the firm commented on forward guidance. Global Sources Ltd. (Nasdaq:GSOL) retreated 22% to the lowest point since March as investors weren’t pleased with earnings results.

Looking ahead to Friday’s session, the market will get data on NY Manufacturing activity and industrial production ahead of the opening, then the Michigan sentiment survey comes out around 10:00 a.m. ET. Also, Chicago Federal Reserve President Charles Evans will talk about the economic outlook around 1:30 p.m. ET. As for the chart structure in small caps, the market appears to be consolidating in the upper portion of the recent range while working off overbought conditions via time instead of price, which is a bullish development. There is still resistance overhead at 758 and 763, but the big test for longer-term watchers is now up at 775, which represents a 61.8% Fibonacci retracement of the entire bear market collapse. On the downside for Friday, support is at 742 (with perhaps a little test just below things at 750), then down at 734.