Sharp opening rally as investors hope for credit lines to thaw

Kevin Pendley | Oct 13, 2008 10:28am EDT | Comment

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Small-cap stocks started the week where they left off late Friday, with the market on a steep upward thrust. The Russell 2000 (NYSE:IWM) soared 11.5% off the lows in the final hour of trading Friday afternoon, and was up another 3.4% at 10:14 a.m. ET, rising 18.02 to 540.50.

The market appeared to emphatically embrace the latest batch of emergency measures from governments around the world, geared to re-instill confidence in frozen credit markets and help avert an even deeper recession. It’s interesting to see that the big rally this morning — supposedly tied to hopes for credit markets to improve — was taking place on a day when the U.S. credit markets were closed for the Columbus Day holiday.

Over the weekend, G7 finance chiefs said that they would use “all available tools” to address the credit crisis, which has erupted into a full-blown global financial contagion. While the G7 statement probably wouldn’t have inspired this much relief for stock market investors, there were plenty of other measures, including an announcement by the Treasury Department that they were developing plans to purchase equity in financial institutions. Also, the United Kingdom said it would pour some 37 billion pounds (about $64 billion) into big banks, a move that German and French officials also said they would take. This morning, the leader of the new $700 billion bail out provided more details about how the program will work, which will help give a sense that a comprehensive plan is underway instead of the government simply hopping about willy-nilly, trying to stomp out fires when they occur. French President Nicolas Sarkozy said this morning that money was available for any bank that needs it and that the government will guarantee bank lending. The market is hopeful that a push by governments to guarantee bank lending will rapidly thaw interest rates on the interbank (LIBOR) level, which has become the most recent poster child for the ongoing crisis.

An argument can be made that after suffering arguably its worst week in history, the stock market was so oversold that a bounce was very likely at some point, and traders will no doubt have some reticence on today’s big move after huge opening rallies failed to hold up on several instances last week.

Crude oil prices are up nearly $4 a barrel this morning, gaining a lift from the rally in equity markets around the world. Energy prices have become a slave to price action in stocks, worried that sinking equities are a sign that the global economy will falter and pinch off demand. In addition, commodities should get a lift this morning from a big slide in the U.S. dollar, which was off some 250 bps, or almost 2% versus the euro.

Financial stocks were among the best performers this morning. Morgan Stanley (NYSE:MS) shot up some 60% on news that Japan’s largest bank was honoring a commitment to purchase a 21% stake in the firm. Other large-cap financial firms of note included Citigroup Inc. (NYSE:C), Bank of America Corp. (NYSE:BAC) and Goldman Sachs Group Inc. (NYSE:GS), which were up 12%, 16% and 12%, respectively.

Individual small caps on the move this morning included OceanFreight Inc. (Nasdaq:OCNF), which was up 23%, trying to recover steep losses from last week. Ultralife Corp. (Nasdaq:ULBI) rallied some 27%, also in the recovery mode, attracting bargain hunters.

The chart picture sports some bottoming promise on daily studies following Friday’s dramatic 11.5% reversal off the intraday lows, which was also formed on solid volume. Turnover could be an issue today with some traders out for the bank holiday in the U.S. Also, it would be nice from a bullish standpoint to see small caps remain in a leadership position from a performance standpoint. Resistance today comes in at 550, with a better test up at 566. On the downside, a slide back below 520 would jeopardize the short-term bottoming argument.