Corrective pullback as financials slump, crude bounces
Small-cap stocks edged lower shortly after the opening, pulled down by weakness in the financial arena, a bounce in crude oil prices and long profit-taking following two sessions of huge gains. At 10:00 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.22, or 0.56%, at 746.84. The Dow was off 0.58%, while the S&P 500 was down 0.51%.
Financial stocks were back in the spotlight this morning, pulled down by a batch of fresh bearish news overnight and a spate of analyst downgrades in various big names. Morgan Stanley (NYSE:MS) and Wachovia Corp. (NYSE:WB) were pressured by the auction-rate security fiasco, as WB settled a probe on the issue and lowered Q2 numbers, while MS offered to reimburse investors. It’s a painful hit to the bottom line that the number one bank Citigroup Inc. (NYSE:C) already has faced. In addition, Oppenheimer analysts lowered the outlook for Goldman Sachs Group Inc. (NYSE:GS). Shortly after the open, MS was down 3.0%, WB off 4.5%, C down 1.2% and GS down 3.3%. The Financial Select SPDR was down 1.9%.
The market also frowned upon a sudden recovery bounce in crude oil prices, which saw the market on black gold move from three-month lows near $113 overnight back toward the $115 zone into the stock market opening. The rise in crude was tied to news that some production and transport in the Georgia region was going to be offline, even though Russian officials have ordered an end to the military conflict.
Elsewhere on the commodity inflation front, corn futures were called lower following USDA’s August production report, which forecast a larger crop than expected. However, softs markets were climbing this morning and the iPath GSCI Total Return commodities index was up about 0.3% in early trading. After huge declines in recent days, a consolidation move or bounce in commodities certainly wouldn’t be a big shock. The GSCI index is down a stunning 22% in the last four weeks.
Earlier this morning, the international trade report came in better-than-expected, with the trade deficit narrowing to minus 56.7 billion dollars, compared with the consensus forecast for a deficit of 61.5 billion. “The trade balance improved in June despite a sharp increase in the oil import bill because of a surge in exports. With the recent retreat in oil prices, the trade deficit will likely continue to improve in the months ahead. These data were much stronger than assumed in the initial Q2 GDP report and will make a 0.8% contribution to the preliminary revision,” Steven Wood, chief economist with Insight Economics, said in an email.
The market response to the trade report was fairly muted. We will often see a big volatile swing in foreign exchange markets on the trade release, but the dollar was reasonably calm after the report and was down slightly through the stock market open. In recent days, a dramatic decline in the dollar has played into the rally in small-cap stocks, even though some analysts are concerned that a strong dollar could crimp exports for some multi-national names.
Broad market sectors on the decline this morning included investment banks, diverse financial services firms, diversified banks, multiline insurance, various REITS, homebuilders and restaurants. On the upside, fertilizer, automobile manufacturers, gold, casinos, metals and agriculture products were attracting buyers.
Individual small caps on the move were highlighted by Physicians Formula Holdings Inc. (Nasdaq:FACE), which gapped lower, losing 15% as earnings disappointed. Zoltek Companies Inc. (Nasdaq:ZOLT), shed 17%, also tied to sloppy quarterly results. Fushi Copperweld Inc. (Nasdaq:FSIN) was down 16% as investors were not enamored with earnings news. Intersections Inc. (Nasdaq:INTX) was up 10% on solid second-quarter earnings. Nelnet Inc. (NYSE:NNI) was up almost 14%, rising to the highest price since May on earnings.
It’s worth noting that small caps were overbought on short-term momentum readings following sensational gains the previous two sessions. The Russell skyrocketed 6.4% from low to high Friday through Monday and the daily RSI pushed into overbought territory, which might have attracted some profit-taking by traders who caught the big move. As the market moves through today’s session, support for the Russell comes in at 742, 734 and 726. If the rally resumes, look for resistance at 758, 763 and 769.
