Economic data lifts Russell despite oil jump

Kevin Pendley | Aug 27, 2008 4:43pm EDT | Comment

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Small-cap stocks went into rally mode Wednesday, as an economic report on “big ticket” purchases soothed investor worries about business and consumer spending habits and allowed the market to shrug off a rally in crude oil prices. The Russell 2000 (NYSE:IWM) closed up 9.44, or 1.30%, at 732.95, and is now down 4.3% for the year. Small caps were strong relative to large-cap indices, with the Dow up 0.79% on the day, while the S&P 500 was up 0.80%. For the year, the Dow is off 13.2%, while the S&P 500 is down 12.7%.

That soothing economic report — the durable goods release — came in well above expectations at a gain of 1.3% versus the forecast for a meager rise of 0.1%. This data base can be quite volatile, but even when extracting the transportation segment (which can skew the total because of huge airplane purchases), the figure was still up 0.7% and well past expectations, which helped investors think that spending patterns for business and consumers were managing to glide through these difficult times without too much disruption.

However, before anointing an erratic economic release like durables as today’s stock market savior, it should be noted that there are far more dynamic reports on tap Thursday in the form of GDP and weekly unemployment claims.

“I’m not a big fan of the durable numbers,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview. “I think there is short-covering at month-end; just look at the rally in Freddie Mac and Fannie Mae. I agree that the financial system is fragile, but the news has not been overly surprising and the end of the month has hedge funds booking profits on shorts. Small caps also have a history of performing well at the turn of the month, and the upside push in oil might be seen by many as a temporary shock given the relatively firm tone in the dollar in recent weeks,” Kalivas said.

Regional banks, industrial machinery, oil and gas equipment were the power sectors today for small caps, and there was some relief that the news from the FDIC on banks in trouble wasn’t even worse, Kalivas said. The FDIC noted that the number of troubled banks is at the highest level in five years and the Wall Street Journal reported that the FDIC might need to borrow money from the Treasury to work through the crisis, troubling talk after the ninth bank failure of the year took place late last week.

Once again, the market was able to look past an impressive rise in crude oil prices, as the market for black gold rose 1.62% to $118.15 dollars a barrel. In just three days, crude oil prices have jumped some 3% as traders are pricing in a weather risk premium in case Hurricane Gustav treks into key oil and natural gas production zone. There is some sense among stock market traders that the gains in crude could be short-lived once the storm worries are over.

It should be noted that volume has been thin this week ahead of the final big summer holiday weekend. “I think one has to be cautious about reading too much into the tape moving toward the end of this week,” Kalivas said. “The rally in companies like FRE, FNM and AIG seems more like short-covering than a bottom,” he said.

Individual small caps of note today include SI International Inc. (Nasdaq:SINT), which gapped higher and soared 35% on unusually brisk volume on news that the firm will be purchased by a U.K. company for $423 million. Also, Key Technology Inc. (Nasdaq:KTEC) was up 10%, rising above the 20-day moving average on a closing basis for the first time since early August. Talbots Inc. (NYSE:TLB) jumped 26% as the women’s clothing retailer retained a 2008 profit forecast that was well clear of Street expectations. On the downside, air carriers suffered through another rise in crude oil prices, with UAL Corp. (Nasdaq:UAUA) down 11%, gapping lower and never recovering.

It will be interesting to see how the stock market shakes out in September, when volume is at better strength, especially since September has been a tenuous month historically. “I lean toward the negative side of things in September,” Kalivas said. “I think global growth is weakening, credit issues are unresolved and election uncertainty will weigh on the market. The risk to my thinking would be a pickup in demand for dollar assets and pockets of attractive valuation. Recent outflows from places like Russia and India are a sign that money is moving to the U.S. for safety,” he said.

Looking at the chart picture, the market remains trapped in the recent range, but the bounce back above the swingline at 726 was a positive signal for the market. Unfortunately, the light volume doesn’t really confirm the updraft, but then the same concern can be raised on recent down days as well. There is a little resistance ridge on short-term charts near the recent highs along 738 that stands as minor resistance going into Thursday’s action. A push through that point could clear the way for a run back toward 750. On the downside, any slide back through 726 would be a troubling sign for the health of today’s bounce.