Buyer confidence climbs; small caps lead market rally

Kevin Pendley | Oct 30, 2008 4:34pm EDT | Comment

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Small-cap stocks pushed higher Thursday, benefiting from money flow out of debt instruments and into equities amid hopes that credit markets are on the cusp of a recovery stirred by global rate cuts. The Russell 2000 (NYSE:IWM) closed up 23.30, or 4.75%, at 514.18, and is now down 33% for the year. The Dow is off 31% for 2008 and the S&P 500 is down 35%. This marked the third consecutive higher close for the Russell 2000, which has not happened since Sept. 12, or before the entire collapse took place. Looking ahead to Friday, the market hasn’t closed higher four consecutive trading sessions since May 30. The fact that small caps aggressively paced today’s rally reflected a more open investor stance on risk, as small caps were pummeled relative to the Dow on the way down in recent weeks.

Investors appeared to gather confidence when this morning’s GDP report came in a tad better than expected, which sparked a renewed appetite for riskier investment fare. The GDP headline figure came in at minus 0.3%, slightly better than the forecast for a slide of 0.5%. Still, this marked the steepest contraction in seven years and reflected the first quarterly decline in consumer spending since 1991. What’s more, economists are unanimously calling for things to get quite a bit worse in the fourth quarter.

However, news that the economy is struggling isn’t exactly fresh news, and investors appeared more confident that the worst of the picture is already priced into the recent collapse. Outside of a wild late slide Wednesday afternoon, intraday stock market gyrations have been a little less frantic and bewildering, and the movements seem a little more orderly, which could also help restore some confidence in equities.

The market continues to nod with approval at the string of declines on inter-bank lending rates, which suggest that confidence is growing between banks on the lending front. After the Federal Reserve slashed 50 basis points off the Fed funds target Wednesday, banks in Hong Kong, Taiwan and Norway followed suit overnight and the Bank of Japan is expected to cut rates on Friday. Next week the market is anticipating more rate cuts out of the European Central Bank, the Bank of England and the Reserve Bank of Australia. Coming into today’s U.S. trading session, Asian, European and emerging market stocks were in rally mode, which sparked a big rise in stock index futures well before the GDP data was released.

Although physical commodity markets were struggling today, commodity-themed stocks were still holding together well, with gas utilities, oil and gas storage and oil and gas drilling stocks among the best-performing broad market sectors. Crude oil prices were actually off $1.54 to $65.96 and the Commodity Research Bureau Index of 19 physical markets was down 2.8%, partly swayed by a recovery bounce in the U.S. dollar off the morning lows.

Despite the solid overall stock market advance today, there were areas that struggled, including insurance, merchandise stores, casinos and leisure products companies. Large-cap firm Colgate-Palmolive Co. (NYSE:CL) jumped some 5% after posting solid earnings, breathing life into consumer staples. In a friendly interest rate environment, bank stocks noticeably lagged the advance, with the PHLX KBW Banking Index off about 0.5%.

Small-cap stocks on the rise Thursday were highlighted by First Industrial Realty Trust Inc. (NYSE:FR), which soared 54% on solid quarterly earnings as the provider of industrial real estate and supply chain solutions saw a mild increase in occupancy rates and same-store net operating income growth. Conceptus, Inc. (Nasdaq:CPTS) rallied 47%, also getting an earnings boost as the birth control firm saw net sales up 62%. Horizon Lines Inc. (NYSE:HRZ) was up 43%, trying to mount a comeback after sinking to 52-week lows a few days ago. HRZ was trading above $30 a share a year ago, and is now trading at $4.70. On the downside today, Polypore International Inc. (NYSE:PPO) tumbled 39% on unusually heavy volume as the maker of battery parts for cars and consumer products posted weak quarterly results.

From a charting perspective, small caps show bottoming promise on daily studies, but will need a strong close Friday to suggest any decent reversal formation on weekly time frames. The push back above 500 on a closing basis was a nice development, and persistent action above that line would help the bottoming argument. The market will likely encounter resistance Friday approaching 514.50, then near 525. A slide back through 500 could see a fairly rapid descent back toward 485, with the next support zone down around 474. Friday also serves up a bevy of second-tier economic releases, but you never know which one might carry a surprise that captures market attention. On the agenda are personal income and the employment cost index at 8:30 a.m. ET, then Chicago PMI at 9:45 a.m. ET and the Michigan sentiment survey at about 10:00 a.m. ET.