Lowest close since June 2003 for Russell; NAHB survey adds to economy woes
Small-cap stocks went into yet another tailspin Tuesday, sinking to fresh bear market lows, unable to sustain morning enthusiasm tied to a positive outlook from a major PC-maker, instead focusing on the global recession, slumping homebuilder confidence and money flow into credit instruments. However, the market staged a brilliant late-session comeback bounce, repeating our recent pattern of seeing wild price swings in the final hour of trading. The Russell 2000 (NYSE:IWM) closed down 3.79, or 0.84%, at 447.51, which marked the lowest daily close since June 2003.
Small caps were hammered relative to large caps, with the Dow closing up 1.83% on the day. For the year, the Russell is now down 42%, while the Dow is down 36% and the S&P 500 is down 41%. Just a few weeks ago, the Russell was only down about 2% for the year while the Dow was down 12%; as the market has collapsed investors have clearly shied away from riskier investment fare as there is a perception in times of crisis that big is better.
Speaking of risk aversion, money appeared to moving into credit markets today, with the yield on benchmark 10-year notes down 2.94%. Yields move inverse to price, so the slide in yields reflects demand for the Treasury product. The decline in yields appeared to pick up speed after the National Association of Home Builders/Wells Fargo Housing Market Index stumbled to the lowest point since the index was created back in 1985. The NAHB report effectively cut off at the knees any enthusiasm from a jump in Southern California home sales, especially heading toward the housing starts report Wednesday morning. That separate report on sales in SoCal showed a big surge in volume, but it came at the expense of price as bargain hunters snatched up a large batch of foreclosed homes at a big discount. There are many who say that the genesis of this global crisis dates back to the housing market collapse and they believe that we won’t see a bottom in the market until we see a foundation built for housing prices.
There is also a pocket of market watchers who believe that equities will have a hard time establishing a bullish foothold it is known what steps will be taken to shore up embattled automakers. General Motors Corp. (NYSE:GM) tumbled some 9% today as Treasury Secretary Henry Paulson said on Capital Hill that the $700 billion financial bailout plan should not be applied to automakers. Even as Paulson and Federal Reserve Chairman Ben Bernanke were busy updating progress on the TARP, auto executives were busy telling the Senate Banking Committee that they need a massive bailout to avoid not just a collapse for domestic vehicle firms, but also the nation’s economy.
In addition to the housing starts report, the market will get a chance to react to consumer price data on Wednesday. Earlier today, the producer price series came in at minus 2.8%, the biggest drop on record and the market is looking for a big drop as well on consumer prices. Given the scant attention paid to PPI this morning, it’s likely stock market investors won’t spend too much time fretting about declining prices on Wednesday either.
That said, much of the decline in producer and consumer prices has been fueled by tumbling crude oil prices and the energy market has started to trade in lock step with equities in recent days. When stocks were up this morning, energy prices were the biggest upside force for equities … when the stock market started to slide this afternoon, crude oil prices moved back into negative territory and energy shares slashed advances. Energy stocks still outperformed the market for the day but commodities remain quite sensitive to demand concerns amid a slumping global economy.
The lower close for small-cap stocks was a stark contrast to a rash of morning enthusiasm when Hewlett-Packard Co. (NYSE:HPQ) posted solid results and then stunned the market by raising guidance for 2009 – a complete reversal from what we’ve seen from other companies. The HPQ outlook helped push stocks (especially large caps) higher through much of the day, but that enthusiasm was doused somewhat by economy worries in the afternoon, especially after the NAHB report.
Individual small caps of note today included Ctrip.com International Ltd. (Nasdaq:CTRP), which gapped lower, losing 14%, while tumbling to the lowest point since February 2006 as the Chinese online ticketing agent projected a sluggish sales outlook. Evergreen Solar Inc. (Nasdaq:ESLR) fell 15% as the solar panel component maker was downgraded by analysts. DivX Inc. (Nasdaq:DIVX), also gapped downward, sinking 22% as the web video software maker reported soft earnings and said Yahoo terminated a contract with the firm. On the upside, IDM Pharma Inc. (Nasdaq:IDMI) shot higher, soaring 64% on unusually heavy volume as the firm’s bone cancer treatment received a positive opinion from European medical authorities. IDMI typically sees daily turnover of less than 50,000 shares – today it reached 2 million.
On the chart front, there are mixed signals. The new closing low is clearly negative, and this remains a “sell rallies” chart structure after the market tumbled to new bear market lows today. However, the bounce off those lows left some promising signs on daily studies, including a long wick recovery off the lows, similar (but less powerful) than recovery moves from Oct. 10 and Nov. 13. Of course, neither one of those reversal patterns on daily studies held up, which takes some of the supportive edge off this pattern as well. Looking ahead to Wednesday, resistance is now at 450; above there, resistance is at 464 and 479. Meanwhile, support is at 432 (we’ll split the difference between the Nov. 13 and today’s low).
