Economy worries stall upside push for small caps
Small-cap stocks opened lower Friday, pulled down by lingering worries about the economy, a dip in stock markets around the world overnight and a renewed safe-haven mentality ahead of the weekend. At 9:58 a.m. ET, the Russell 2000 (NYSE:IWM) was down 5.99, or 1.17% at 508.19.
A fresh batch of second-tier economic data debuted this morning, with the Michigan sentiment survey coming at 57.6, which represented a record monthly drop off the 70.3 reading in September. However, the figure was basically in line with expectations. The Chicago Purchasing Manager’s Survey came in at 37.8, which was well below the forecast of 48.3. Stock index futures slipped a tad after the Chicago report.
Earlier this morning, the personal income report came in at 0.2%, which was slightly better than the forecast for a meager gain of 0.1%. Meanwhile, the employment cost index was up 0.7%, which was in line with the forecast. Even though the market generated a nice rally Thursday in the face of a negative reading on quarterly GDP, there seemed to be a more subdued mood this morning, almost a sense that the economy isn’t going to improve anytime soon, so a recovery in the stock market could take time. Bulls will say that all the upcoming bad news on the economy is already priced into the market and that stocks will rally away from the lows long before the worst data comes out.
Japan’s Nikkei stock index slumped 5% overnight, even though the Bank of Japan delivered its first rate cut in seven years. However, the rate cut was already widely expected, setting up a “sell-the-fact” response from traders.
As the stock market lurched toward the end of a historic month investors seemed reluctant to extend a three-day buying spree in small caps and money was moving back into Treasury markets at the start of today’s activity. The yield on benchmark 10-year notes was down 2.7%, which reflects strong demand for Treasury notes as the yield moves inverse to price.
Today’s trading will not only close the books on a dreadful month for the stock market, but also represents the final week of trading before voters decide on a new president next week. Barack Obama is considered a solid front-runner into the elections Tuesday, but John McCain is still considered to have a shot in the race, keeping some uncertainty in the air ahead of the vote. In the 20th century, the stock market sports an average rally of about 10% in the 12-month period when a Democrat takes over the White House.
Crude oil prices were slumping today, down about $2 a barrel amid a resurgent U.S. dollar overnight. The greenback was up some 1.6% against the euro as markets around the world look for a currency safe-haven. Higher valuation for the dollar tends to hurt pricing structure for many major commodities (including oil), which are priced in dollar terms. The dramatic free fall in energy and other commodity prices this month has been a blessing for strapped consumers already hit with sinking home equity and rising unemployment, but it has also hurt stocks with commodity themes.
Technology stocks paced early declines in equities, tugged down by news that tech bellwether Intel Corp. (Nasdaq:INTC) said in a regulatory filing that the financial crisis could hurt business. INTC shares were down 2.2% shortly after the open. Also on the large-cap front, General Motors Corp. (NYSE:GM) tumbled 4.4% on talk that negotiations to merge with Chrysler have stalled.
Individual small caps of note today included Penson Worldwide Inc. (Nasdaq:PNSN), which was down 32% on news that a subsidiary has incurred a $15.5 million unsecured receivable from a firm that has ceased operations. PNSN shares gapped lower and tumbled to the lowest point since March. Bare Excentuals Inc. (Nasdaq:BARE) also gapped lower and shed some 38% on soft earnings news. On the upside, Retalix Ltd. (Nasdaq:RTLX) jumped 31% as the software provider for food distributors and retailers gapped higher on the open.
Intraday chart studies sport a nice symmetric “v” bottom rally toward the gap from the Oct. 22 lower opening. That move has basically played out and today’s action will be important to help validate bottoming formations on daily and weekly studies. If the market continues in the red today, key support comes in at the “figure” at 500. A weekly close back below that point would take a lot of the punch out of this week’s recovery move. Below 500, support is at 491 and 485. On the upside, the market stalled Thursday near logical resistance at 514.50; from there, resistance comes in at 525.
