Investors rush in, hoping bottom is in place amid rescue jubilee

Kevin Pendley | Oct 13, 2008 12:55pm EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks extended the rally into midday trading, powered by ideas recent government plans to pour billions of dollars into banking institutions, while mopping up toxic debt with taxpayer coffers would right the ship in equities and avert an even deeper global economic downturn. At 12:45 p.m. ET, the Russell 2000 (NYSE:IWM) was up 32.27, or 6.18%, at 554.76.

The Russell was pushed through minor “figure” resistance at 550, then stalled just shy of 555. While 555 might offer some resistance of note based on previous price action, the key upside test spot from here is actually up at 567. Although the chart patterns have improved dramatically since the big bounce off Friday’s lows, there is still some concern that today’s rally was driven more by oversold conditions than a true sense that clogged credit lines were starting to pry open. In addition, much of the hope for a bottom is tied to a thaw in lending practices and the credit market is closed today for the Columbus Day holiday.

Speaking of additional measures to shore up listing banks, European governments over the weekend said that they would guarantee inter-bank loans, which should help ease the distrust that has seen Libor rates holding high despite interest rate cuts around the world.

In addition to that move, government bodies in the United Kingdom, France and Germany said that they would plow billions of dollars into key banks and the U.S. Treasury Department said that they were considering plans to purchase equity in financial institutions. Some might see that as a “green light” to buy financial stocks present depressed values, but financial shares as seen in the Financial Select Sector SPDR and the PHLX KBW Banking Index were actually underperforming the overall market at mid-session, which is something of a surprise.

The top performing broad market sectors included automobile manufacturers, investment banks, coal stocks, managed healthcare, oil and gas storage and transportation companies, life health insurers, fertilizer firms and aluminum stocks. Commodity stocks have been beaten down in recent weeks, but the combination of an improved psychology today on the economic outlook coupled with a slide in the U.S. dollar against the euro sparked a bullish run on that area. The poorest performers were real estate investment trusts, homebuilders and regional banks.

Among small caps of note, Key Technology Inc. (Nasdaq:KTEC) was up 35%, building on the recovery move off Friday’s fresh move lows. iGate Corp. (Nasdaq:IGTE) jumped some 33%, also making a corrective bounce off last week’s lows. This theme was playing out through the small-cap sphere, as investors looked for bargains after the recent collapse.