Small caps soar; energy shares, Bernanke in the spotlight

Small-cap stocks started out the week with an impressive rally, riding the crest of climbing energy stocks, signs that the credit crisis is on the improve and talk from Federal Reserve Chairman Ben Bernanke that additional fiscal stimulus could be needed. The Russell 2000 (NYSE:IWM) closed up 20.40, or 3.88% at 546.83. The Russell is now down 29% for the year, while the Dow is off 30% and the S&P 500 is down 33%. Small caps lagged large caps today even on the rally, which is a little bit of concern as the same pattern was evident on the recent collapse.

Crude oil futures climbed 3.3% today as energy traders anticipate OPEC will cut production to counter soft demand and sinking prices. However, while the energy story was the dominant theme today, the move was powered by more than gains in the physical market. Oppenheimer analysts announced upgrades for several stocks in the sector and merger news also played a supportive role, which powered buying in beaten down energy stocks across the market capitalization spectrum. As for the M&A news, NRG Energy Inc. (NYSE:NRG) received an unsolicited bid of $6 billion from Exelon Corp. (NYSE:EXC) and the firm would not rule taking this hostile status if need be. The general rule of thumb is that if there are deals to be made in the large-cap world, then there are probably even more attractive deals to be found in the small-cap spectrum.

Interestingly, the rally today in crude oil and energy stocks was not a general push for commodities. In fact, the U.S. dollar gained about 0.6% versus the euro, which makes dollar-denominated commodities more expensive, and despite the rally in crude oil, the Commodity Research Bureau Index of 19 physical markets was basically flat.

The stock market was already on solid footing overnight on news of another steep decline in the inter-bank (or Libor) lending rate, which suggests that frozen credit lines are starting to thaw and that banks are beginning to trust each other . . .

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