Credit crisis fears spark sell-off in small caps
Small-cap stocks took a hard turn south Monday as a revival of credit crunch fears turned a sleepy morning opening into an aggressive afternoon slide. The Russell 2000 (NYSE:IWM) shed 11.40, or 1.51%, to 741.97, while the Dow lost 180.51, or 1.55%, to 11479.38 and the S&P 500 was down 19.60, or 1.51% to 1278.60. For the year, the Russell is off 3.1%, the Dow down 13.4% and the S&P 500 down 12.9%.
The charts provided a caution sign Friday that the bull run might be on fumes when the Russell made new move — and yearly — highs but closed in negative territory. With the short-term bulls content to take profits amid overbought momentum readings, it left the market vulnerable to any bad news, and today’s credit fears filled that void with a vengeance.
For the better part of a year now, the credit crisis has never really gone away, but remained simmering in the background until another flare-up would bring those fears to the forefront. Today’s flare-up was tied to concerns that Treasury funding and recapitalization of government-sponsored enterprises (GSEs) would work to the detriment of current stockholders in mortgage lending giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). It wasn’t the kind of news that investors in those firms wanted to hear, and FNM shares tumbled 21%, while FRE was down 24%. Those fires were then fanned by talk that Lehman Brothers Holdings Inc. (NYSE:LEH) could be facing massive losses in the next earnings release and that the firm might pre-release earnings. LEH shares slipped 5%.
The investor psyche surrounding financial shares is quite fragile, and the GSE/LEH woes spread like wildfire through the entire sector. The Financial Select Sector SPDR Fund was down 3.6%, while the PHLX KBW Banking Index was down 3.6%. Top U.S. banks such as Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC) were singed by the renewed fears, losing 4.7% and 4.3%, respectively.
It should be noted that today’s slide in the stock market wasn’t just a one-themed story, however. When looking at S&P sector groups, the only area registering more than a 1% gain on the day was gold. As one might expect with the FNM and FRE slide, thrifts and mortgage finance firms were the worst performers, but they had company from homebuilders, oil refiners, casinos, automobile manufacturers, insurance, regional banks and retail food stocks. It really didn’t matter what business you were in today, it wasn’t easy to attract investors.
The decline in homebuilder stocks was an interesting part of the day. Last week’s action saw a decent performance in the sector, and analysts were seen providing bullish coverage for luxury homebuilders — perhaps a sign that the worst of the housing market crisis was at hand. However, homebuilder sentiment remained mired at record low levels, according to today’s National Association of Home Builder/Wells Fargo Housing Market Index. There is a broad perception among investors and analysts that when the housing market recovers, that is when financial stocks will recover, leading to the economic recovery and the labor market recovery. Right now, it still takes a leap of faith to see the light at the end of the housing recovery tunnel.
OK, now that we’ve got all the fretting news out of the way, it should be noted that this is prime vacation and holiday season around the world, which makes the market susceptible to sudden moves on limited volume. What’s more, as we noted earlier, the market was overbought following a rapid 18% rally from the July 15 low to the August 15 peak. If the Russell continues to slide this week as we get more economic data, then it would make today’s turnabout look a little more serious. For now, there is chart support on dips to 734, then again at 726. Meanwhile, any bounce should find sellers lurking in the 750, 758 and 764 regions.
For the first time in awhile, crude oil gyrations seemed like a minor part of the day for equities. Crude actually took a decent slide, sinking $0.90 a barrel to $112.87 as traders said Tropical Storm Fay was unlikely to disrupt production in the Gulf of Mexico. The U.S. dollar was basically flat against the euro, but lost about 0.4% versus the yen. Although crude oil prices were lower today, many commodity markets bounced, correcting higher after significant recent declines. The Commodity Research Bureau Index of 19 commodities markets was up 0.5% today, powered higher by a jump in sugar, orange juice, gold and significant gains in the grains markets.
Looking at individual small-cap stocks today, North American Galvanizing & Coatings Inc. (Nasdaq:NGA) tumbled 16%, rejecting new 52-week highs set in the morning to close sharply lower. That trend of plunging suddenly after weeks of strong gains was echoed in many small-cap stocks today. A similar reversal of fortune was notched in Transcend Services Inc. (Nasdaq:TRCR), which slumped 13% after forging eight-month highs in the morning. On the upside, Crocs Inc. (Nasdaq:CROX), the plastic shoe maker, put together a 13% rally as it tries to recover from a dramatic fall from grace. Back in October, CROX was a $75 stock; today it rallied back above $5 bucks.
