Employment blues keeping small caps down; energy tops drag
Small-cap stocks remained solidly lower into midday trading, as a sharp reduction in non-farm payrolls and the highest unemployment rate in 15 years took a toll on the investor psyche. Energy and commodity stocks were the primary bearish influence, although a pullback in homebuilder and retailer shares also weighed on the market. At 11:31 a.m. ET, the Russell 2000 (NYSE:IWM) was down 11.01, or 2.51%, at 428.52.
Crude oil prices tumbled below $42 a barrel, the lowest point since January 2005 as energy traders fretted about a global recession, led by their biggest customer – the United States. Energy stocks were off about 5%, far outpacing other sectors. Surprisingly, financial and bank shares were actually slightly positive despite the downbeat jobs report.
Those worries in the commodities arena about the demand side of the equation only gathered momentum after today’s dreary employment report not only showed the unemployment rate rose to the highest level since 1993 at 6.7%, but also reflected the largest one-month drawdown in payrolls since December 1974. The Commodity Research Bureau Index was down 2.3% this morning, setting fresh bear market lows while tumbling to the lowest point since August 2002. Among S&P sector groups, the biggest losses were seen in oil exploration and oil production, broadcasting, gold stocks, oil and gas drillers, power products, metal and mining shares, forest products, coal and oil and gas storage.
With plenty of somber news in the air today, it was interesting to see that financial stocks were holding up reasonably well. There continues to be a thought process among investors that economic data will lag the actual bottom in equities and for the recovery. As a side note, it’s interesting to see that today’s non-farm payroll decline was the worst since the December 1974 report (which was released Jan. 3, 1975). The bottom for the recession back in the mid-70s actually took place in December 1974. What happened way back in January 1975 as the market digested the fourth worst monthly loss in jobs in history? The Dow actually rallied 13% that month. That’s not to say things are the same now as they were then, and in fact, most are expecting the unemployment rate will continue to ratchet higher in December and January. But that kind of history will provide some impetus to buyers looking to snap up bargains thinking that the bottom is relatively close by.
President Bush spoke about the economy into the midday period, saying that there are encouraging signs in the credit market, that he was concerned about the viability of auto companies, that taxpayer money for bailouts should be repaid and it was important for Congress to act next week on the auto bailout issue. The market did not move much after his initial comments, and General Motors Corp. (NYSE:GM) stock was down about 2% shortly after the first portion of his speech.
Looking at individual small caps on the move today, Berry Petroleum Co. (NYSE:BRY) tumbled 23%, pulled down by the overall slide in energy companies. Exco Resources Inc. (NYSE:XCO) was off 17% as the oil and gas firm also was pulled under with the energy decline. Another commodities firm taking a hit was Patriot Coal Corp. (NYSE:PCX), which was off 15%, swayed not only by the commodities fall, but also by news that Bank of America Corp. (NYSE:BAC) would cut lending to coal mining companies in an environmental move. On the upside, Thoratec Corp. (Nasdaq:THOR) rose 15% as the firm said its trial heart pump device was a noted improvement.
The chart picture for the Russell retains a long-term dynamic bear market structure, with some mild short-term bottoming potential tossed into the mix. The market has basically been stuck in a range this week defined by last Friday’s high and Monday’s collapse low. A breakout in either side of that range (473 on upside; 416 on downside) is needed to suggest a new powerful move is ready. Looking at today’s action, there is support at 424.50, which held up nicely on the morning lows. From there, support comes in at 416 and 406, while resistance is at 454, 464 and 473.
