Small caps close in the green

Kevin Pendley | Apr 18, 2008 4:47pm EDT | Comment

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Small-cap stocks charged higher Friday, giving beleaguered bulls a happy weekend sendoff. The Russell 2000 (NYSE:IWM) rose 13.07, or 1.85% to 721.07, the highest daily close since mid-February as investors embraced the latest batch of earnings numbers with open arms.

In a sense, it was a perfect storm of broad-based earnings reactions Friday, with Citigroup Inc. (NYSE:C) lifting financials, Google Inc. (Nasdaq:GOOG) fueling technology issues, and Caterpillar Inc. (NYSE:CAT) sparking buying interest in the manufacturing sector.

It perhaps took a little creativity on the part of investors to “spin” the Citigroup story into a positive one, as the company still reported massive debt write-downs and missed the earnings estimate. In essence, investors looked through the headline numbers and decided the story on Citigroup was headed toward happier times.

However, no such rose-colored glasses were needed for Google or Caterpillar. Google shot 20% — or about $90 bucks a share — as earnings topped estimates, and Caterpillar, which climbed about 8%, also beat their forecast despite sluggish economic conditions in the manufacturing sector in recent months. Just to add a little extra good vibes into the mix, another manufacturing giant, Honeywell International Inc. (NYSE:HON) also reported strong earnings and rose nearly 6% on the day.

April options expirations came into play today, and the market appeared to be out of position on the short side, which likely fueled the rally, said Nick Kalivas, vice president of financial research with MF Global, in a phone interview. In addition, “there is an enormous amount of cash on the sidelines at low yields, which is also forcing some people back into the market,” he said.

Another bullish element stirred into the pot Friday came from a strong performance by the U.S. dollar, which rose 0.6% against the euro and about 1.2% versus the yen. It was interesting to see that U.S. equities were not deterred by a reversal in crude oil prices, which slumped overnight, but then did an about face Friday to set yet another record high. A Goldman Sachs economic research report this morning noted that although oil prices were a key factor for worldwide economies, they did not carry the same power that was seen in the 1970s, and that the current impact from oil prices “may not be as large as conventional wisdom suggests.” Goldman’s research work carries a lot of weight in the investment community, and that kind of thinking could take some of the edge off record high oil prices. Still, it sure helps investors shrug off crude oil prices more easily on a day when stocks are up 1.5%.

Gold prices took a hit Friday, as hot money moved into equities away from the yellow metal. Another potential hot money trend to watch could be money shifting away from China equities and toward U.S. companies, as China stocks fell 3% overnight to a 52-week low.

Among individual small-cap issues, Vantage Energy Services (AMEX:VTG) was up 0.6% on high volume without any noteworthy fresh news. Other stocks fitting that same bill were Sterling Bancorp (NYSE:STL), up 2.47% and American Campus Communities (NYSE:ACC), up 2.96%, both without any stirring news in the mix. Upside movers on heavy volume with news were West Bancorporation (Nasdaq:WTBA), lifted 3.74% on earnings, and Digital Ally Inc. (Nasdaq:DGLY), on news of new contracts to supply Utah and Virginia customers with video rearview mirror systems. iGate Corp. (Nasdaq:IGTE) shot up 20.4% on positive earnings and SiRF Technology Holdings Inc. (Nasdaq:SIRF) climbed 17.9% amid a leadership switch.

On the downside, Universal American Corp. (NYSE:UAM), was down 1.9% on heavy volume without any fresh news. Tomo Therapy Inc. (Nasdaq:TOMO) collapsed nearly 30% on poor earnings news and China Grentech Corp. (Nasdaq:GRRF) tumbled 23% in the wake of soft earnings numbers. Horizon Lines Inc. (NYSE:HRZ) was down 5% amid reports that federal search warrants and grand jury subpoenas were put together to look into pricing practices of ocean carriers in the Puerto Rico area.

Looking ahead to next week’s action, Kalivas said that he is focused on these three keys:

• The China stock market. If it continues to sink, it could become a trouble spot for U.S. equities.
• The ebb and flow of earnings. Can investors continue to find the “good news” on these reports? Monday serves up Bank of America Corporation (NYSE:BAC) and Texas Instruments Incorporated (NYSE:TXN), which could each set the early tone next week.
• The Libor/credit issue. Will this become a problem again and reassert fears of the credit crunch?

From a charting standpoint, Friday’s rally lifted the market to the highest point on an intraday basis in nearly eight weeks, which keeps equity heat on any Johnny-come-lately shorts. Sustained action above 700 also helps validate the bottoming action that has been building on longer-term charts off the March and January lows. Looking ahead to next week, the big test now lies at 731, which marked a powerful double top on daily charts back in early February. In addition, the Russell is battling the 100-day moving average once again, and has not been able to hold convincingly above that line for months.