Bottom fishing for nibbles on sinking crude oil
Small-cap stocks edged higher this morning, underpinned by a slide in crude oil prices overnight that was extended just before the stock market open. Equities are also oversold following sharp recent declines, which sparked a batch of bottom fishing and profit-taking from the shorts. At 9:51 a.m. ET, the Russell 2000 (NYSE:IWM) was up 5.03, or 0.76%, at 670.81.
Crude oil futures were down more than $4 dollars a barrel just below $141 heading into the U.S. stock market open, which was a welcome pullback after hitting a record high last week above $145. Still, energy prices were expected to find buyers on dips as tension in the Middle East remains high and crude oil stocks are tight.
The dip in crude prices was accompanied by a rise in the U.S. dollar, which was up about 0.5% against the euro and about 0.8% versus the yen. The tone surrounding ECB comments after last week’s rate hike also were perceived as less hawkish than expected, which lent support to the greenback. Within the commodity spectrum, copper prices tumbled about 3% in early trading and grains futures were called sharply lower ahead of their opening later this morning.
Although the stock market was starting out the week on an up note, it’s hard to look past sharp recent declines that have pushed the Dow and small caps into bear market territory once again. In a weekend research report, analysts at Goldman Sachs said that activity in financial markets closely resembles a double-dip slowdown in economic activity, and that the fiscal stimulus package helped drive up the market from mid-March to June.
“Of course, markets typically move before the real economy does, and this time is no different. The U.S. economy is still in the midst of its stimulus-induced rebound,” Goldman’s report said. “As a result, real GDP growth is tracking modestly in positive territory for Q2, possibly borrowing from the 2% growth rate we expect for Q3. However, beyond the apparent resilience of non-auto retail spending, it’s clear that the fundamentals of the economy are still weakening. Housing prices continue to decline rapidly, the credit crunch is becoming increasingly evident in lending data, oil is marking new highs, and — last but not least — the labor market is unraveling.”
Broad market sectors on the rise this morning were highlighted by arenas that have been crushed in recent months, namely casinos, automobile manufacturers, thrifts and mortgage financial firms. Also, semiconductor shares and home improvement retails stocks were attracting buyers. On the downside, anything tied to oil was taking a beating this morning, including drillers, storage and exploration. Also, gold stocks were trending lower.
Individual small caps on the move early include First M&F Corp. (Nasdaq:FMFC), which was up 14%, generating a nice bounce after making move lows late last week. Western Refining Inc. (NYSE:WNR) rallied about 10%, also recovering from multi-month lows forged last week. Small caps on the downdraft this morning included Interactive Intelligence Inc. (Nasdaq:ININ), which was down 33%, gapping lower after announcing preliminary quarterly results. Virtusa Corp. (Nasdaq:VRTU) was off 21%, also on earnings-related news.
Looking at the chart picture, the market is oversold on daily and intraday momentum readings, which heightens the potential for a correction or sideways consolidation early this week. The 14-period Relative Strength Index (RSI) on daily charts is at the lowest point since the March bottom, and weekly RSI readings are approaching levels that coincided with the lows in January and March. Important short-term support is evident today in the Russell at Thursday’s lows near 661, which mark a double bottom on hourly charts. From there, minor support is at 654, then the next big level is down at 650. On the upside, look for resistance today at 672 and 679.
