Corrective speed bump on soft financials
Small-cap stocks slipped Tuesday, pulled down by struggling financial sector shares and a profit-taking mentality following sizable gains the previous two sessions. The Russell 2000 (NYSE:IWM) was off 6.12, or 0.82%, at 744.94, while the Dow was down 1.19% at 11,642.47 and the S&P 500 was down 1.21% at 1,289.59. For the year, the IWM is down 2.75%, the Dow off 12.22% and the S&P 500 down 12.19%.
Small caps made a huge move during Monday’s rally relative to large-cap shares, fueled somewhat by ideas that a sinking U.S. dollar would stand to benefit smaller, domestic companies more than large multinationals who depend on sales to foreign customers. But even on today’s pullback, small caps still outperformed the Dow and S&P 500, reflecting investor taste for riskier fare and also on thoughts that previous similar economic cycles have benefited small caps over large-cap shares. However, the Russell was trumped today by the Nasdaq 100, as tech stocks put together a solid performance.
Tech stocks — and most equity indices in general — were underpinned on dips by a slide in crude oil prices, which slipped below $113 dollars a barrel for the first time in three months and eventually settled U.S. trading right near the $113 line. Demand destruction remains a concern for the energy market, as the Energy Information Administration today reported the largest drop in U.S. demand in 26 years, which countered some bullish supply concerns tied to the Russia/Georgia conflict. Elsewhere on the commodity front, gold price tumbled 1.7%, but the Commodity Research Bureau Index of 19 commodity markets was only off about 0.3%.
A recent surge in the U.S. dollar has played a key role in the decline of energy and other commodity prices, but today the greenback was relatively calm, failing to get a charge out of a surprisingly strong international trade report early this morning. The trade deficit narrowed to 56.7 billion dollars, which was better than the forecast for a deficit of 61.5 billion. Normally that would be enough to trigger more volatile response from foreign exchange traders, but with the dollar already soaring 7.5% from high to low in just four weeks against the euro, the market may have been too exhausted to get a rise out of the data. For the day, the dollar was basically flat against the euro and down about 0.6% versus the yen.
In the financial arena, debt write-downs, analyst downgrades and losses tied to customer reimbursement on auction-rate securities were the dominant themes dragging banks, investment banks and brokers into the red. Among big name players, JPMorgan Chase and Co. (NYSE:JPM) stumbled 9.48% as the firm said they have seen another $1.5 billion in write-downs already this quarter. Goldman Sachs Group Inc. (NYSE:GS) shed 6.01% amid analyst downgrades from Deutsche Bank and Credit Suisse. Wachovia Corp. (NYSE:WB) sank 12.14% as the nation’s fourth-largest bank raised their previously stated second-quarter loss and settled an auction-rate security probe. Just within the last couple of weeks, the largest U.S. bank — Citigroup Inc. (NYSE:C) — agreed to buy-back $7 billion in auction-rate securities and pay a $100 million fine to settle charges that it misled investors about the risk. Even though that might be old news for C, the stock was caught in the general financial undertow today and lost 6.46%. A similar theme was seen for Bank of America Corp. (NYSE:BAC) shares, which were down 6.74%.
In addition to the slide in financial stocks, homebuilders and railroad stocks also were hit hard Tuesday. The best-performing sectors included fertilizer, agriculture products, auto parts, home entertainment software, gold and automobile manufacturers.
Individual small caps on the move today included Comverge Inc. (Nasdaq:COMV), which tumbled 30% as the market was not happy with quarterly results. ACI Worldwide Inc. (Nasdaq:ACIW) was off about 30%, also on soft earnings news. ACIW shares had been climbing steadily in recent weeks and hit a new high Monday, only to give back all the gains and then some on today’s rout. Another stock that recoiled off move highs set Monday was Almost Family Inc. (Nasdaq:AFAM), which slumped 16%, leaving a double top on daily charts. A stock finding good news on the earnings statement today was Intersections Inc. (Nasdaq:INTX), which rallied 29%.
The chart picture in the Russell suggests that the market was overbought on daily momentum indicators coming into today’s session, with the relative strength index above 60, a line that had coincided with previous market peaks, which made the market more vulnerable to a corrective breather. The inside session pullback on relatively thin volume was not that much of a concern, and the chart structure remains in a bullish position. Still, the breakout Friday and Monday filled some of the short-term upside targets which may have generated additional profit-taking from hot money longs who caught the move. The next big test for the Russell comes in at the previous June peak near 763. If the market can mount a push through that point, then 775 comes into focus as the next key point. On the downside, it would take a slide back through 726 to truly endanger recent upside action, but support near 734 is also a zone to watch on any extension of today’s pullback.
