Russell closes mildly higher

Kevin Pendley | Aug 26, 2008 4:31pm EDT | Comment

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Small-cap stocks endured a choppy day of trading Tuesday, vacillating between positive and negative territory as index traders juggled both the positive and negative stock market implications of a rise in crude oil prices. In addition, the market struggled to evaluate the supportive side of an upside surprise in consumer confidence and a strong U.S. dollar against Federal Open Market Committee (FOMC) concerns about slower spending and the potential for further declines in payroll numbers. In the end, the Russell 2000 (NYSE:IWM) closed up 2.97, or 0.41%, at 723.51. For the year, the Russell is now down 5.5%, while the Dow is off 13.9% and the S&P 500 is down 13.4%.

Despite the uneven action today in small caps, it should be noted that price moves took place on relatively light volume, as we are winding down the summer vacation season, both here in the United States and abroad. Of greater significance is that the market has plunged back into the old range, validating the bearish topping pattern from the recent highs. In addition, the violation of key support along the 726 zone now leaves the market vulnerable to a slide toward the next logical support area near 711.50.

The lasting impression from today’s action could very well be the somber tone on the FOMC minutes (although the higher close certainly tames those concerns); but there were plenty of economic hurdles to navigate earlier this morning, including reports on housing and consumer confidence. The biggest surprise was a better-than-expected reading on consumer confidence, which laid the foundation for a relatively solid morning in stocks. The headline figure on confidence came in at 56.9, which was above the forecast of 53. It’s still not a lofty figure historically, but the upside tilt was enough to allow investors to shrug off sluggish figures on housing market.

Before the market opened, the Case-Shiller Home Price Index came in at minus 15.9, slightly better than the projection for minus 16.2. There were pockets of housing price strength, which was a positive signal, but the decline in home values on an annual basis were still record large. Then, after the opening, the New Home Sales report showed volume at an annual rate of 515,000 units, which was below the consensus estimate of 530,000 and at the lowest pace since September 1991. There are many market watchers who believe that the overall stock market malaise will not end until there are definitive signs that the housing recession is over. Looking ahead to Wednesday’s action, the durable goods report and a speech on inflation by Federal Reserve Bank of Atlanta President Dennis Lockhart both arrive ahead of the opening, but neither seems likely to make a big stir for the market.

Through much of today’s session, it was difficult to tell whether or not the rise in crude oil prices today was bullish or bearish. We’ve all grown accustomed to associating higher energy prices with a bearish reading on stocks because higher gasoline pump prices tend to stunt consumer spending elsewhere and can be a drag on economic activity in general. However, there are times when the supportive nature of energy gains provides enough of a lift to energy stocks that it can actually be a boost to the market indices in general. That was the case much of today until the FOMC minutes stirred up a new wave of selling. As for the specifics on crude oil today, the market was up $1.16 dollars a barrel to $116.27 as traders were in the mood to put on a little upside risk premium for energy markets while Hurricane Gustav churned into the Gulf of Mexico, which harbors some 25% of U.S. crude production and another 15% of natural gas output. Commodities in general were in rally mode, despite a rise in the U.S. dollar. The iPath GSCI Total Return commodities index was up 0.68%, while the greenback stormed up 0.75% against the euro to the highest point since February.

Broad market sectors on the decline today were paced by specialized finance, homebuilders, Internet retail, electrical components, Internet software services, automobile manufacturers, tire and rubber stocks and footwear companies. On the upside, thrifts, oil exploration, gas utilities, oil and gas storage were the top performers.

Individual small caps of note included Comverge Inc. (Nasdaq:COMV), which rallied about 10% as the stock struggles to mount a recovery move after slipping to move lows last week. China Eastern Airlines Corp. Ltd. (NYSE:CEA) was up 9%, as this lightly traded airline stock also strives to recover from recent trend lows. Electro-Optical Sciences Inc. (Nasdaq:MELA) was up 9%, climbing above the 20-day moving average on a closing basis for the first time since mid-June. On the downside, Palm Harbor Homes Inc. (Nasdaq:PHHM) stumbled 11% and has been sinking this week after climbing to multi-month highs last week.