M&A news, expected House rescue OK overshadow weak jobs

Small-cap stocks pushed higher on the open, setting aside a troubling labor market picture to focus on merger activity in the banking arena, and a widely expected House approval of the financial rescue plan. At 9:51 a.m. ET, the Russell 2000 (NYSE:IWM) was up 10.45, or 1.64%, at 648.11.

The Labor Department reported that 159,000 non-farm payroll jobs were lost in September, which marked the worst loss in some five years. Even scarier is that economists are predicting more jobs will be lost in the next couple of months as the economy deals with the deepening credit crisis.

“The collateral effects of the recent turmoil in the credit markets will likely make the job losses even larger next month,” Steven Wood, chief economist with Insight Economics, said in an email. “So far this year, 760k jobs have been lost. The economy has clearly slipped into a jobs recession because the housing meltdown and credit market turmoil has spread to the broader economy. Persistent job losses have probably pulled the overall economy into recession as well,” Wood said.

The employment rate held steady at 6.1%, but it appeared that the market saw the bad news on jobs as a rubber stamp for the House financial rescue plan vote later today, and perhaps an emergency rate cut by the Federal Reserve to boot. The ability to see the glass as “half-full” on the somber monthly employment report was also likely enhanced by oversold conditions and a reluctance by hot money shorts to carry exposure through the House vote.

About 90 minutes ahead of the opening, news broke that Wells Fargo & Co. (NYSE:WFC) would merge with Wachovia Corp. (NYSE:WB), and that the deal would be consummated without any financial assistance from the government or FDIC. Shortly after the open, WB shares shot up 76%. WFC stock was up 8%, even though the firm said that they would incur integration charges of about $10 billion and would issue up to $20 billion of new securities, mostly common stock. This deal would nix Citigroup Inc.’s (NYSE:C) earlier bid for WB’s banking assets, a development that Citi’s holders frowned on, with C’s stock off about 13% shortly after the open.

The U.S. dollar remained on a strong roll this morning, climbing to fresh yearly highs against the euro, which kept heat on crude oil prices. Crude slipped more than $1 a barrel in tandem with the strong stock market open. With credit instruments on the slide, the dollar up and stocks in rally mode this morning, asset flows certainly were pointing toward equities and away from commodities and Treasuries.

Broad market sectors on the rise this morning were highlighted by diversified banks, multiline insurance companies, construction firms, regional banks, life health insurance, thrifts, steel stocks, asset management firms and specialized finance institutions. Consumer services and soft drink companies were lower, but the losses were relatively tame.

Individual small caps of note included Pinnacle Financial Partners Inc. (Nasdaq:PNFP), which rallied nearly 12%. Also, PDF Solutions Inc. (Nasdaq:PDFS) was up 14%. On the downside, National Western Life Insurance Co. (Nasdaq:NWLI), which tumbled some 35%.

The chart picture retains an intermediate and long-term bearish bias and it would take a massive rally today for the Russell 2000 to avert the lowest weekly close in three years. As the day progresses, resistance on rallies should be seen at 647 to 650 (which was being tested right after the open), then at 660. If the sell-off is resumed, then support is at 635 and 624.

About the Author
Kevin Pendley covers the Russell 2000 index for SmallCapInvestor.com and writes a weekly technical analysis column. Read More

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