Commodity strength counters slumping banks

Kevin Pendley | Jan 16, 2009 4:44pm EST | Comment

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Small-cap stocks pushed higher Friday, fighting back from a midday slide into the red as commodity stocks, homebuilders and airline stocks offset another rough day for banks. The Russell 2000 (NYSE:IWM) closed up 3.82, or 0.83%, at 466.45, but still lost 3.1% for the week. For the year, small caps are off 6.6%, while the Dow is down 5.6% and the S&P 500 is down 5.9%.

Banks have been the dominant focal point for investors this week, and it has been a brutal period for some of the world’s most prominent financial firms. Citigroup Inc. (NYSE:C) tumbled 48% for the week and Bank of America Corp. (NYSE:BAC) shed 45% while posting its first quarterly loss in 17 years and the lowest daily close in more than a decade. Even news overnight that the government was extending another $20 billion of direct injection into BAC and guaranteeing $118 billion of assets couldn’t stem the selling tide today; BAC lost another 13.7%.

We’re only a little more than halfway through the month of January, but according to the S&P sector groups the biggest three losers are diversified financial services firms (down 38%); diversified banks (down 35%) and regional banks (down 27%). There is a segment of the investment community that doesn’t believe the market will go higher without leadership from the financial sector – if they are right, then the New Year is off to a troubling start indeed.

Even though it has been a dour start for banks this year, it’s interesting to note that call activity for Citigroup is starting to pick up steam, suggesting that investors are trying to take a shot at bargain hunting for the embattled firm. This afternoon, Bill Gross, leader of the world’s largest bond fund at PIMCO, said that the worst might now be over for bank balance sheets.

Next week’s holiday-shortened trading affair features what is likely the lightest economic calendar of the year: the only indicators are housing starts and weekly claims on Thursday morning. That means earnings news, stimulus plans and worldwide events will be the primary directional influences on the market. No matter what, it promises to be an historic week as President-elect Obama sheds the “elect” portion of his current title and is sworn into office Tuesday as the 44th President of the United States and the first African-American to lead the world’s most powerful military and to oversee the world’s largest economy.

Inheriting an unpopular war and the worst recession since the Great Depression will only intensify the focus on his actions for not just America, but for the world as well. We have already seen global markets generate huge moves on his previous plans for a massive infrastructure program to create jobs and help bolster the sagging economy. Perhaps setting the bar low to start, or maybe just being realistic, Obama cautioned today that the economy will get worse before things improve. Even though there have been some lowlights this week, such as the snags on Obama’s selection of Timothy Geithner to run the Treasury Department, it has been a good week in many ways for Obama as he was granted authority to spend the next portion of $350 billion in TARP funds and House Democrats unveiled a $825 billion stimulus plan.

Crude oil prices climbed 3.1% today, adding $1.11 a barrel to $36.51, which likely helped stabilize energy and other commodity markets. The Energy Select Sector SPDR Fund was up 0.8%. A slide in the U.S. dollar today likely helped support various commodity markets and provide a cushion for commodity-tied stocks — the greenback was off about 1.3% against the euro. Within the commodities realm, oil refiners and gas utilities were strong performers today. In the physical market, corn prices shot up 6% amid worries about a drought in Argentina, which competes with U.S. farmers on the global market.

Individual small caps on the move today were highlighted by Aercap Holdings NV (NYSE:AER) as the Netherlands-based aviation company soared 22% to the highest daily close since early November. Airline stocks in general were solid performers today, with the AMEX Airline Index up 4.6%. Small-cap carrier US Airways Group Inc. (NYSE:LCC) climbed 13% a day after the emergency crash landing in New York’s Hudson River was pulled off without any fatalities. Polypore International Inc. (NYSE:PPO) climbed 12% as the filtration maker reversed a string of recent losing sessions. On the downside, it was an ugly day to be in the beauty business, with Elizabeth Arden Inc. (Nasdaq:RDEN) pacing small-cap declines all day long, sinking some 39% on unusually heavy volume after lowering guidance. Inter Parfums Inc. (Nasdaq:IPAR), another cosmetics company, was off some 10% and big-cap beauty firm Estee Lauder Companies Inc. (NYSE:EL) fell 10% as well.

The chart structure for small caps actually was able to retain the bullish pattern reversal from Thursday’s action, despite a strong midday scare when the Russell slipped down to 451.80. On a short-term basis, action above 452 next week would bolster the bullish formation from Thursday’s recovery rally and suggest further upside toward 473 and perhaps 491. Any slide back below 450 opens the door to a nasty downside press toward 416.