Nervous dip awaiting rescue plan fate
Small-cap stocks took a tumble Wednesday, pulled down late in the session by concerns over the political wrangling tied to the financial rescue plan, which offset optimism spurred by news that Warren Buffett was investing $5 billion into Goldman Sachs Group Inc. (NYSE:GS). The Russell 2000 (NYSE:IWM) closed down 11.41, or 1.61%, at 697.78. For the year, small caps are off 8.9%, while the Dow is down 18.3% and the S&P 500 is down 19.2%.
The White House appears willing to acquiesce to Congressional calls for curbs on executive pay, but there are still other details to work out, including what many consider a glaring lack of oversight considering the amount of money on the table. The market appears willing to wait anxiously for the bill to pass, but each day that lingers could spike angst among financial market watchers.
Buffett’s decision to charge back into investment banking generated a wave of good tidings this morning. If the “Oracle of Omaha” thinks that bank stocks might be near a bottom, then other investors could also be brought back to the fold. For the day, Goldman Sachs shares were up about 3%, but the rising tide at GS didn’t necessarily lift all financial stocks.
The market remains concerned that the mountain of bad debt spurred by the housing crisis is choking off credit lines, reflected by price activity in the Libor market, which suggests strained lending patterns right now between bankers. Hey, if banks can’t get a good loan, then who can? Fresh economic data on the housing front was nothing to get excited about either. The existing home sales report came in down 2.2% at a rate of 4.91 million units, which was off the projected pace of 4.94 million. Earlier, before the opening, the MBA Mortgage Applications Survey slipped 10.6% to the first decline in four weeks, likely pulled down by a rise in mortgage rates.
“Existing home sales peaked during the summer of 2005 and fell steadily through September 2007,” Steven Wood, chief economist with Insight Economics, said in an email. “Since then, home re-sales have been relatively flat, suggesting a bottom may have been reached. However, the inventory of unsold homes, while declining, is still very high, putting downward pressure on both new construction and home prices. Home prices have been falling on a year-on-year basis for the past two years and, in recent months, the price declines have accelerated. As long as inventories stay very high, prices will decline. As long as home prices decline, the value of mortgages and mortgage-backed securities will be under downward pressure,” he said.
Many have suggested that until we see the housing market start to recover, then the current mess in financial markets won’t be over either. Given recent sluggish data on not only the housing front, but also on the employment side of things, there is still plenty of cause for concern — even with a massive government bail-out plan to absorb reams of bad debt.
Interestingly, despite the soft home sales numbers, homebuilder stocks were among the best sector performers today. And even though crude oil prices edged $0.88 a barrel lower today, oil refining stocks, oil and gas drillers and gas utility stocks were also strong sector performers. Tech stocks started out the day as the top draw on Wall Street, and held that position through the close, with the tech-laden Nasdaq 100 closing in positive territory. Within techs, semiconductors and biotechs were the most attractive sectors. Broad market sectors on the slide today were highlighted by airlines, insurance companies, tire and rubber firms, coal stocks and thrifts. American International Group (NYSE:AIG), slumped some 28% today as the government finalized a deal to assume an 80% ownership stake in the beleaguered firm.
Individual small caps of note included H&E Equipment Services Inc. (Nasdaq:HEES), which collapsed some 26% after setting fresh move highs last week. Joseph A Bank Clothiers Inc. (Nasdaq:JOSB) slumped 20% in what looks like a sudden profit-taking flurry after being a small-cap star in recent days. James River Coal Co. (Nasdaq:JRCC) was off about 14% after the firm announced plans to sell some 1.5 million shares of common stock.
The chart picture remains top-heavy, and today’s late selling foray below “figure” support at 700 was not an encouraging sign. The old Fibonacci point at 692 is still an important point to watch for Thursday — decisive action below 692 would suggest that all the upside action has been corrective in nature and that a test of the lows is needed. Below 692, support comes in at 684 and 678. On the upside, resistance is pegged at 707.50, then up at 720.50.
