Crude oil tanks, investors buy stocks

Kevin Pendley | Aug 22, 2008 4:24pm EDT | Comment

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Small-cap stocks pushed higher Friday, ending a difficult week on an up note, as crude oil prices reversed course, a legendary investor soothed market jitters and monetary policy leaders struck a reasonably upbeat tone. In the end, the Russell 2000 (NYSE:IWM) closed up 12.36, or 1.70%, at 737.60, but still lost more than 2% for the week and small caps are still down 3.7% for the year. The Dow closed up 1.73% and is now down 12.3% for 2008; meanwhile, the S&P 500 rose 1.13% Friday and is down 11.9% for the year.

Stock market watchers got a taste this week of just how fickle and tumultuous commodity markets can be when uncertainty is in the air. With all eyes on crude oil gyrations the past few days, the market for black gold collapsed down to the $112 handle a couple days ago, then shot back up above $120 the very next day. Today, the market cooled off, with crude generating the largest one-day percentage decline in some four years, backing down to $115 as a strong dollar put the brakes on demand for commodities. Still, with geopolitical tension in the mix between Russia and the United States, and with hurricane season pulsing through the tropics, stock market traders could get seasick tethered so tightly to crude oil.

Speaking of physical markets, the Commodity Research Bureau Index of 19 various commodity markets tumbled more than 2% today, as the slide was widespread beyond just the realm of energy. A big part of the decline was tied to a sudden resurgence in the U.S. dollar, which looked awful just one day earlier. Before the market opened this morning, billionaire investor Warren Buffett said on CNBC that he was not short the dollar and that the stock market was better off today than it was a year ago, which bolstered a fragile investor psyche. On Thursday, the greenback was absolutely hammered against the yen and fell hard against the euro as well, which sparked fears of a resurgence in commodities and a flight away from U.S. assets. However, the rout on the dollar proved to be very short-lived, and the buck was back near multi-month highs against many currencies today. At this stage of the economic cycle, a strong dollar is seen as a positive for the U.S. economy and for stocks in general, as it should attract more investment into dollar assets and reflects favorably on the economic picture.

About 30 minutes after the market opened this morning, Federal Reserve Chairman Ben Bernanke gave a speech on financial stability, and his words came across as cautious, but reasonably positive. The market took his talk to suggest that rates are still on hold, which is a happy thought for banks and other firms looking to access cheap money from the government coffers. Bernanke said that the recent decline in oil prices and a firmer dollar should help on the inflation front. The Fed is still in a difficult position because they are basically forced to combat inflation via jawboning instead of actual rate tools because the economy is still in a fragile position. Next week’s economic calendar will serve up fresh data on the second quarter preliminary GDP, which is widely expected to show a growth spurt took place, moving the economy safely clear of the “recession zone.” Also, next week will reveal fresh statistics on home sales, consumer confidence, weekly claims, personal income and manufacturing in the Midwest, so it will be busy week for the number crunchers.

It has been an awful few weeks — make that an awful year — in which to be long financial stocks, and this week was basically one dreadful event after another, but today brought relief on the financial front as apparently a buyer stepped forward for beleaguered investment brokerage firm Lehman Brothers Holdings Inc. (NYSE:LEH). Investors embraced the talk of a potential buyer, gobbling up LEH shares for a gain of 9% on the day. What’s more, the good tidings spread throughout the financial arena, with the Financial Select Sector SPDR Fund rising 3%. Big name firms like Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC) and Morgan Stanley (NYSE:MS) all saw impressive gains Friday, and when Buffett (a.k.a. “The Oracle of Omaha”) coyly said he was upping his stake in one of his financial investments — either American Express Co. (NYSE:AXP) or Wells Fargo & Co. (NYSE:WFC) — the market said “why quibble over which one” and bought them both. AXP gained 4.9% and WFC was up 3.1%

While financial stocks were enjoying a rare moment in the sun today, retailers also found reason to smile. The sharp pullback in crude oil prices is always a welcome sign to retailers worried about seeing consumer purchases end up in a gas tank instead of at a store, but today also served up plenty of earnings news to stir the pot as well. While the news wasn’t all cherries and cream — just ask small-capper Pacific Sunwear of California Inc. (Nasdaq:PSUN), whose shares collapsed 26% on somber results — the overall tint was positive. In fact, the S&P Retail Index gained 2.5% on the day. Specialty stores and department stores were among the top performing sectors Friday, joined by specialized finance, investment banks, consumer finance firms and hotels. As you might expect given the slide in crude oil, commodity names were the worst performers, with coal, oil exploration, metals and mining, gas utilities, gold, oil and gas drillers counted as the worst performing sectors of the day.

Individual small-cap stocks making an upside statement today included several airlines, which always like the idea of a cheaper jet fuel. US Airways Group Inc. (NYSE:LCC) stormed 15% higher Friday. A little over a month ago LCC shares were at $1.45 and looked like a penny stock just waiting to happen…now LCC is at $7.84. Speaking of the friendly skies, UAL Corp. (Nasdaq:UAUA) joined in on the party and jumped nearly 13%, Republic Airways Holdings Inc. (Nasdaq:RJET) was up 12% and Alaska Air Group Inc. (NYSE:ALK) was up 6% as well.

Elsewhere in the world of small caps, Blue Coat Systems Inc. (Nasdaq:BCSI) rallied 17%, gapping higher as earnings were heartily embraced by investors. It was all about the upside over at Overstock.com Inc. (Nasdaq:OSTK), which rose 12% a few days after filing to sell up to $500 million in debt securities, stock and other paper to raise money.

On the downside, Perry Ellis International Inc. (Nasdaq:PERY), gapped lower and tumbled 24% on unusually heavy volume after the apparel maker reported a loss for the quarter. Physicians Formula Holdings Inc. (Nasdaq:FACE) slumped 9% to new 52-week lows following sloppy earnings results.

From a charting perspective, the Russell still has some worrisome elements in play, naming the bearish reversal off fresh move highs from last week that corresponded with a similar failure zone on the June peak. The market is now consolidating under the shadow of last week’s top and did a nice job of consistently battling back above key 726 support this week.