Five-year weekly closing low for Russell as techs slump, retailers swoon
Small-cap stocks threw a gasket in the final hour of trading Friday, giving back a lion’s share of Thursday’s stunning rally off new bear market lows while finishing with the lowest weekly close since August 2003. Slumping tech stocks, dreadful retail sales and a risk-averse mentality took a toll on a market that is starting to get a penchant for wicked afternoon volatility. The Russell 2000 (NYSE:IWM) closed down 34.71, or 7.07% at 456.52 and is now down 40% for 2008, while the Dow is off 36% for the year and the S&P 500 is down 41%.
Small caps entered the day on a mildly weak note, unable to graft higher on modest gains in Europe and Asia and seemingly not able to revive the manic bargain-hunter push from Thursday afternoon. A big part of the problem is that no matter how hard investors try to write off ugly economic data, at some point the blows wear down psychology, kind of like a fighter who’s been absorbing body shots for several rounds.
The latest stinger on the data front was this morning’s retail sales report, which posted the largest October decline on record (the series only dates back to 1992). The slide was 2.8%, well below the forecast for a decline of 1.5%, but perhaps a little closer to the “worst case” scenarios that were floating about. It doesn’t help matters that consumer spending appears to be falling off a cliff into the holiday season and a fresh batch of earnings reports from retail firms simply added to the spending worries.
The S&P Retail Index tumbled about 7% today as a recurring theme played out for stores that we all frequent from time to time – everything from apparel to home improvement to electronics – they all basically warned that forward projections were at risk as the U.S. economy lurches through the recession. Speaking of recession, eurozone economists beat the official U.S. designators to the punch by declaring that Europe is mired in its first recession in 15 years.
And a European firm, Nokia Corporation (NYSE:NOK) sounded a warning bell that sales would fall way short of expectations in coming months. Nokia is the world’s largest cell phone maker and troubles there mean trouble for a whole host of tech companies, hence the underperformance in the Nasdaq 100 today versus the Dow and S&P 500. NOK finished out the day with a 11% loss, while competitor Motorola Inc. (NYSE:MOT) was down 10.7% and mobile phone chip maker QUALCOMM Inc. (Nasdaq:QCOM) was off 5.4%.
The large percentage spread differential today between small caps and the Dow reflected a risk averse mentality that is prevalent in the market right now, and it was a dead ringer that when the Dow pushed into positive territory around 3 p.m. ET that the move was tenuous at best (because small caps were still down about 3% at the time). Another sign of the desire to avoid riskier investment fare was seen in the Treasury market, where yields on 10-year notes and 30-year bonds tumbled some 3% as investors looked for a safe spot to park money.
Individual small caps on the move today included MedCath Corp. (Nasdaq:MDTH), which gapped lower and tumbled 45% on heavy volume as the hospital operator badly missed the earnings forecast. Another small cap firm taking a big hit on unusually active volume was PAM Transportation Services Inc. (Nasdaq:PTSI) as the truckload dry van carrier slumped 27% while crumbling to 52-week lows. RSC Holdings Inc. (NYSE:RRR) fell 25% as the Scottsdale, Arizona-based equipment rental company gave back not just Thursday’s gains, but quite a bit extra as well. Bucking the overall downdraft, Acura Pharmaceuticals Inc. (Nasdaq:ACUR) rallied 22%, but the move was accomplished on fairly light volume.
The chart structure for the Russell retains a powerful long-term bearish bias and the inability to validate Thursday’s bullish reversal clearly tarnishes any short-term bottoming arguments. Looking ahead to next week’s action, the market needs to generate a rally back through 551 to stop the cycle of lower lows and lower highs, but faces resistance roadblocks along the way at 490, 514.50 and 525. On the downside, there is support from the previous low at 442, and then at Thursday’s reversal low of 433. If the latter doesn’t hold, then all the chartists will be back at the drawing board looking for even more severe long-term downside targets (loyal readers of the Technical Analysis weekly column will remember that our recession target was at 430). As for other events next week, the economic calendar focuses on inflation and manufacturing, and the FOMC minutes on Wednesday afternoon could also attract some attention.
