Record retail sales slump, money flow to credit pulls down stocks
Small-cap stocks opened lower, pressured by bleak retail sales data, soft earnings news, a pullback in energy prices, money flow into credit markets and a “breather” mentality after Thursday afternoon’s humongous recovery rally. At 9:57 a.m. ET, the Russell 2000 (NYSE:IWM) was down 5.85, or 1.19%, at 485.39.
Today’s “big event” -- the retail sales report, came in below expectations with a record October drop of 2.8%, far off the projection for a 1.5% decline, but closer to the whisper numbers making the round late this week. Stock index futures were down about 1.5% before the awful retail sales release and they remained down about 1.5% in the 60 minutes following the report, which suggests that other factors were at play. This morning’s Michigan sentiment survey came in at 57.9, which was slightly better than the forecast of 56.5, and which appeared to have little impact on trading.
The pullback this morning could simply be the market taking a break after a stunning bullish reversal off bear market lows Thursday. There is also a chance that traders don’t want to be caught short over the weekend just in case the G-20 comes out with some stunning stimulus package. G-20 leaders started an economic summit today in Washington to discuss the ongoing global financial crisis. And while G-20 leaders are in Washington working on ways to fix the world’s financial problems, central bankers are over in Europe, where the latest news overnight is that the eurozone economy slipped into recession for the first time in 15 years. Bernanke said that bank liquidity measures were generating tentative improvements in credit markets and that central banks remain ready to act if needed. His comments came into the teeth of the retail sales release but seemed to have limited initial market reaction.
Libor rates edged up again overnight for the second consecutive session, which raises some caution flags among investors about the lending mentality around the world. Within the credit spectrum this morning, money seemed to moving into Treasury products, with the yield on benchmark 10-year notes tumbling more than 3%. Since yields move inverse to price the big slide on rates reflects demand for Treasury products. Energy shares were a big positive factor for the market during Thursday’s rally, but were a drag this morning as crude oil prices slipped about $0.70 a barrel shortly after the stock market open.
From an individual company standpoint, it wasn’t hard to bump into troubling stories this morning. Starting in the retailer zone in honor of today’s brutal retail sales report, the market saw decent quarterly returns from several big retailers, but a near unanimous reduction in the forecast. JC Penney Company Inc. (NYSE:JCP) slightly topped the forecast but cautioned that economic conditions will remain difficult well into the New Year. Also, shares of Kohl’s Corp. (NYSE:KSS) and Nordstrom Inc. (NYSE:JWN) tumbled in extended hours trading Thursday afternoon after the firms reported weak profits and downgraded the outlook. Abercrombie & Fitch Co. (NYSE:ANF) beat the estimate, but slashed the forecast as well. Shortly after the open, JCP was down 4.1%, KSS off 0.9%, JWN down 7%, ANF off 4.1% and the S&P Retail Index down 1.0%.
Outside of retailers, Nokia Corporation (NYSE:NOK), the world’s largest cellphone maker, reduced global phone sales expectations, which has ramifications for a host of tech companies. NOK was off 12% early this morning.
Individual small caps on the decline this morning were highlighted by MedCath Corp. (Nasdaq:MDTH), which tumbled 33% as the health care services provider reported quarterly results. Ardea Biosciences Inc. (Nasdaq:RDEA) fell 27% as the biotech firm also fell on earnings news. Lasalle Hotel Properties (NYSE:LHO) fell 17% as the luxury hotel operator rescinded their previous outlook as results are falling well short of expectations. On the upside, Fuqi International Inc. (Nasdaq:FUQI) rallied 24% as the China retailer got an earnings-related lift.
Looking at chart activity, if you get a sense of “déjà vu,” you’re right. Thursday’s big reversal rally off fresh bear market lows marked the third time in the last four-plus weeks we’ve seen a similar bullish reversal off new lows, and the truly eerie thing is that they were all spaced apart by 12 trading sessions. If the pattern holds up again, then new lows are due Dec. 2. The big key here is that the market needs to break free of this cycle of lower lows and lower highs. To that end, a rise back above 551 without making new lows would be a positive development, but would appear to be a goal to set aside for later. As for today’s activity, the market is testing the first logical short-term support zone around 482; below there, very little noteworthy support is seen until we get closer to 467. On the upside, resistance is at 495 and 505.
