Financial, retail, airline stocks pace impressive rally

Kevin Pendley | Aug 28, 2008 4:27pm EDT | Comment

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Small-cap stocks continued to climb Thursday, powered by a solid performance in financial, retail and airline stocks, by yet another “good news” economic report and by a sudden downdraft in crude oil prices. The Russell 2000 (NYSE:IWM) gained 14.85, or 2.03%, to 747.79 and is now down 2.38% on the year.

Small caps were strong relative to the S&P 500 and also broke free of a close pattern they had been keeping with tech stocks. The S&P 500 was up 1.48% and is down 11.4% for 2008, while the Nasdaq was up 0.78% and is off 8.1% for the year. Meanwhile, the Dow was up 1.85% and is down 11.6% for the year.

On the financial front, investors continue to gain confidence in government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), which has become a source of great relief for banks, insurance firms and a host of other financial shares. FNM rose another 22% today has recovered over 50% from last week’s lows when investors were concerned that all the share equity in GSEs would be rendered worthless. A shakeup in management at FNM and talk that the firm’s balance sheets were not as bleak as feared powered the latest recovery move today.

The ripple effect throughout financials was easy to see, with the Financial Select Sector SPDR Fund climbing 3.8% and the PHLX KBW Banking Index up 4.0%. Big-name firms such as Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) both registered gains in the 5% range.

Some of the bullish psychology for today’s action was tied to this morning’s upside surprise on the GDP report, which came in at 3.3%, well above the forecast for a rise of 2.7%. The GDP report was just the latest in a friendly string of data surprises this week, including consumer confidence Tuesday and durable goods Wednesday. On its own merit, second-quarter GDP is somewhat dated since we’re nearly two-thirds of the way through the third quarter, but when the market is rallying, it’s easy to see the data with rose-colored glasses. A separate report on the labor market — weekly unemployment claims — was basically in line with expectations and was shuffled to the backseat in favor of the GDP glow. Looking ahead to Friday’s session, it will be interesting to see if the upswing in data can be maintained through personal income, consumer sentiment and Midwest purchasing reports.

Even with the supportive GDP report in hand this morning, the stock market advance appeared tenuous as market watchers were concerned by yet another steep rise in crude oil futures. Early today, crude oil was near $120 a barrel as the market priced in risk premium with Tropical Storm Gustav heading toward key energy production zones in the Gulf of Mexico. Gustav is expected to regain Hurricane status soon and on computer looks to be one of the most serious threats to the Louisiana coastline since Katrina and Rita back in 2005. The storm is projected to slam into the Gulf coast in about five days, which means that energy traders will be wary of holding shorts over the extended holiday weekend. However, news that strategic petroleum reserves could be released if the storm mangles production in the Gulf sparked a dramatic turnabout in crude oil futures near midday. By the end of the day, crude was down nearly 3% below $115 dollars, which sparked an extension in the stock market rally.

Retail stocks were already merry following a spate of decent earnings reports overnight, and the combination of good news on the economy from the GDP report and an about-face in crude oil prices just kept the good tidings rolling along. The S&P Retail Index was up nearly 2% on the day and firms such as Dillards Inc. (NYSE:DDS) and small-cap retailer Jo-Ann Stores Inc. (NYSE:JAS) were prominent among the top gainers today. DDS gained 9%, while JAS was up 10%.

Airline stocks were also a big story Thursday, clearly buoyed by the reversal in crude oil prices. The AMEX Airline Index was up some 8% today, with JetBlue Airways Corp. (Nasdaq:JBLU) rising 12%, Delta Air Lines Inc. (NYSE:DAL) up about 11%, Northwest Airlines Corp. (NYSE:NWA) up 13% and small-cap carriers US Airways Group Inc. (NYSE:LCC) rising 15% and Alaska Air Group Inc. (NYSE:ALK) up some 10%.

Looking at the chart picture today, the rise in the Russell through resistance near 739 was impressive. The market also closed above opening levels for the third consecutive session, something that has not happened in four weeks. Still, the index is basically marking time in the range on light volume. A decisive breakout to new highs would hammer home quite a bit more urgency on the bullish side of things, while any slide Friday back below 737 would mean that the market seemed impressive without really accomplishing anything (last week’s close was 737.60).