Small caps extend Friday rally as Obamanomics boost in play

Kevin Pendley | Dec 08, 2008 10:16am EST | Comment

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Small-cap stocks pushed higher on the opening, lifted by a rally in overseas markets, weekend talk of a huge infrastructure stimulus plan from President-elect Obama and a bounce in commodity stocks. At 9:57 a.m. ET, the Russell 2000 (NYSE:IWM) was up 10.19, or 2.21%, at 471.28.

Crude oil prices were up about $2.70 a barrel into the stock market open, trying to mount a bounce after hitting four-year lows Friday and tumbling some 25% last week while generating the largest percentage decline in some 18 years. Copper prices also were higher overseas, and soft commodities like sugar and cocoa were soaring in early U.S. trading.

Some of the support in commodities was tied to a slide in the U.S. dollar, which was down 1.2% against the euro. The dollar was up 0.4% against the yen, but that was more of a reflection of a riskier mentality in play after last week’s big stock market bounce off the bearish jobs picture (the low-yielding yen tends to find support in safe-haven times). So, just where is the FX flow moving today? The Mexican peso and South African rand were both in rally mode today, as money flow into emerging markets and commodity exporters was in vogue.

A big part of the early rise in stocks was tied to news this weekend that Obama was planning a massive infrastructure stimulus project, which sparked a rise in engineering and commodity stocks in Asia and Europe that rode the tide into U.S. action this morning. Obama also said that U.S. automakers should not be allowed to fail, and the Senate is meeting today to discuss bailout packages for U.S. vehicle firms. Shortly after the open, General Motors Corp. (NYSE:GM) was up 19.1%, while Ford Motor Co. (NYSE:F) was up 15.4%.

Despite the feel-good tone present in the glow of Friday’s triumphant stock market rally despite dreary employment data, there were spots of worrisome news in play. Dow Chemical Co. (NYSE:DOW) announced plans to close 20 plants and layoff 5,000 workers. Despite the news, DOW was up 4.3% early on. Illinois Tool Works Inc. (NYSE:ITW) lowered the outlook, as did 3M Company (NYSE:MMM). MMM was off about 1.5% early, but ITW was up 1.5%.

Small caps on the move today included DryShips Inc. (Nasdaq:DRYS), which gapped higher and climbed 32% on decent volume amid the general updraft in commodity themes. Polypore International Inc. (NYSE:PPO) jumped 17%, climbing above the 20-day moving average with conviction for the first time since late August. Getting a lift from the infrastructure talk and the announcement of dividends, Chicago Bridge & Iron Co. N.V. (NYSE:CBI) rose 17%. On the downside, Allos Therapeutics Inc. (Nasdaq:ALTH) was down 22% after reporting a drug trial update.

The chart picture for small caps made an important leap this morning, jumping above the recent range highs that were defined by the Black Friday peak of 473.14 and last Monday’s collapse low of 416. From a strict breakout perspective, sustained action today above 473 would suggest an upside target move of 530. The big test from here (if 473 can remain beaten) comes in at 491, which marks the previous correction peak off a bullish reversal from bear market lows. If the market can climb through 491, it would mark the first time that small caps have pushed through a previous peak and would snap the bearish behavior cycle of lower lows and lower highs.