Epic rally as bargain hunters rush back in

Kevin Pendley | Oct 13, 2008 4:44pm EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks remained in rally mode today, starting out the week with a bang after staging a remarkable 11.5% rally off the lows late Friday afternoon. Investors rushed in to snap up bargains, buoyed by hope that another round of global rescue measures would fortify recent lows as the recession bottom. The Russell 2000 (NYSE:IWM) closed up 48.41, or 9.26% at 570.89, generating the largest one-day advance of the year. For the year, the Russell is now down 25.4%, while the Dow is off 29.2% and the S&P 500 is down 31.6%. Amazingly, the Russell is now up more than 20% from the low, but I doubt if any market pundits will be rushing to say this is now a bull market.

Investors seemed to be more confident that governments around the world were now approaching the credit crisis with a concerted, determined effort to unthaw frozen lending lines and not just responding to each new failure on a piecemeal basis. Either that, or the market was simply oversold after historic recent declines and ripe for a big corrective bounce.

If you are in the camp that believes the measures are moving into place to protect the global financial system, then weekend news that government bodies in the United Kingdom, France, Germany and the United State would pour billions into teetering banks, guarantee interbank loans and even purchase equity in key financial institutions appeared to be the perfect tonic to soothe fears about a deep recession spawned by an international lending crisis. The Libor has become the litmus test for the lack of trust in the lending community, and rates fell hard overnight after the latest round of worldwide rescue measures were announced. If you’re curious, Libor stands for the London Interbank Offered Rate and it is the rate at which banks lend money to each other in the wholesale money market. It’s supposed to be somewhat comparable to the Fed funds rate, but right now the Fed funds target is at 1.5% while the Libor rate (for the dollar) is closer to 4.7%

Interestingly, financial and bank shares actually lagged the overall market rise today, as commodity, insurance and healthcare stocks powered the rally. Automobile manufacturers were particularly strong, with General Motors Corp. (NYSE:GM) jumping some 28% as talk circulated that GM was considering some merger opportunities with the other “Big 3” firms.

Oil and gas storage stocks were strong performers today, with crude oil futures jumping some 4% on optimism over the international bank rescue plans that bolstered equities. Crude oil prices slumped to 13-month lows Friday amid worries about a global economy slowdown, and commodity shares in general have been sinking like a rock in recent weeks, fueled by the growth worries, a strong dollar and active hedge fund liquidation of long commodity trades. The dollar slipped against the euro today (although losses were pared significantly from morning declines), which provided some relief on the commodity front as physical markets priced in dollar terms go down in price on a softer currency, which allows end-users to pay more for the actual product. The Commodity Research Bureau Index of 19 physical markets rallied some 3% today after hitting the lowest price Friday since January 2007. Along that commodity theme, metal and mining shares were strong today, as were fertilizer stocks, steel and aluminum firms.

When looking through individual small caps of note today, a clear theme developed; big gains were registered in firms that were beaten up to move lows last week. As it looked like investors were taking a stab at bargain hunting on hopes that the overall market has made an important low. A-Power Energy Generation Systems Ltd. (Nasdaq:APWR), gapped higher and jumped some 60% bouncing off 52-week lows registered last week. APWR has been sinking steadily for months, peaking above $30 a share back in July and now trading below $7 even with today’s big advance. Another energy stock making waves today was ATP Oil & Gas Corporation (Nasdaq:ATPG), which rallied 38%, making the familiar bounce off move lows that was so common today in the big movers. iGate Corp. (Nasdaq:IGTE) was up some 43%, trying to recover from steep losses registered the last three weeks. So, which stocks didn’t perform Monday in the small-cap world? Overall, financials seemed to lag. Also, Media General Inc. (NYSE:MEG) was down some 18%.

Looking at the chart picture for the Russell 2000, today’s upside follow through off Friday’s recovery charge was an important validation. However, today’s rise was accomplished on somewhat lighter volume given the bank holiday in the United States, so it will need to see further proof on Tuesday when the market is at full trading strength. There was very little noteworthy resistance on this bounce higher, which often happens when a market is coming off huge volatility and massive daily ranges. The next upside test of note for the Russell is at 566 to 570, which is right near today’s closing level. Above there, resistance comes in at 615 and 649. It would take a breach of 649 to truly add “punch” to the bottoming argument, and obviously that could take a few days. On the downside, any breach of 520 would seriously dampen the bullish case and point to a likely retest of the move lows from Friday. Given the dramatic rally across all market-caps today, it might seem silly to fret about this, but it’s a little bit of a concern that small caps lagged the bounce today. Perhaps it’s just a simple case of the Dow and S&P 500 catching up to the Russell’s recovery Friday, but on the way down the Russell underperformed.