Mild dip as retail sales, M&A take edge off profit-taking
Small-cap stocks edged slightly lower, pulled down by profit-taking from traders who caught the rally Monday, by analyst downgrades for several brokerage firms and by ongoing jitters over crimped consumer spending. However, better-than-forecast retail sales data generated some buying interest this morning. At 9:55 a.m. ET, the Russell 2000 (NYSE:IWM) was down 2.01, or 0.27%, at 731.23.
The retail sales report sported a headline figure at minus 0.2%, which was in line with the forecast, but the ex-autos figure was up 0.5%, which was well above the consensus of 0.2%. The surprisingly stout sales figure sparked a reversal in overnight selling in stocks, pushing stock index futures and index basket products into the green ahead of the regular opening.
The market has seen a run of late where economic data surprises on the upside, but many in the economic community remain unconvinced that a recovery in equities or the recent above-forecast data means that the economy is out of the woods. “Equity prices in the United States, Europe, Japan and India show a noticeable recovery from this tumultuous period, while stock prices indexes in China, Brazil and Russia have also posted gains from their recent lows. We remain skeptical because the worst of the weakness in U.S. business activity is not here yet,” Asha Bangalore, economist with Northern Trust, said in an email.
The market could continue to bask in the glow today of the Hewlett-Packard (NYSE:HPQ) purchase of Electronic Data Systems (NYSE:EDS) for $12.6 billion, which will heighten the anticipation of additional merger and acquisition activity. If there is M&A activity in large caps, certainly there are deals to be done for small-cap companies as well.
Coming into today’s session, the market was on the defensive in overnight trading on a dip in European shares following a jump in U.K. inflation data and write-downs from a large French bank. In addition, an Oppenheimer analyst downgraded brokerage firms, which sparked some concern. Overseas stock market indices were mixed, with Europe down and Asia mostly higher. China shares were only off 1.3% despite the massive earthquake that has led to an estimated 12,000 casualties.
Wal-Mart (NYSE:WMT) released earnings and topped the projection by a penny, but issued somber forward guidance, which stirred overnight selling in the discount retailer’s shares. Shortly after the open, Wal-Mart was down 1.2%, which could spill over into other retail stocks despite the decent morning retail sales figures. Wal-Mart’s CFO says the firm is “concerned” about gas prices and the National Retail Federation said this morning that consumers will be forced to use much of their tax rebate money to pay for gas and groceries instead of electronics or clothes. “The rising cost of groceries and gasoline means that discretionary spending is taking a backseat to necessities,” Tracy Mullin president and chief executive of the NRF said in a statement.
Federal Reserve Chairman Ben Bernanke spoke earlier this morning about liquidity issues in the financial markets. Bernanke said that the liquidity measures taken by the Fed to ease the credit crisis have helped, but that the markets are still “far from normal.” Stocks, Forex and interest rates were quiet on his comments early on, preferring to respond instead on the retail sales figures. However, sometimes it takes time for the market to generate a response to Fed-speak, and we still have several speakers on the docket later on. At 1:00 p.m. ET, Federal Reserve San Francisco President Janet Yellen will talk about the economy, as will Kansas City Fed President Thomas Hoenig at the same time. Then, at 1:30 p.m. Dallas Fed President Richard Fisher will talk about the economy.
For the first time in awhile, the market seemed comfortable to not put the glare of the morning spotlight on crude oil prices, which edged lower early this morning. A report from the International Energy Agency forecast a slowdown in demand, and China’s imports for the month of April dipped versus year-ago levels for the first time in 18 months. The dollar was firm heading toward the stock market opening, which was also seen as a mild positive for equities.
Among broad market sectors, early gains were seen in construction, publishing and leisure product shares, while losses were seen in home entertainment software, gold and apparel retail stocks.
Individual small-cap shares on the move this morning included Iomai Corp. (Nasdaq:IOMI), whose shares more than doubled on news that the firm was bought out by Austrain vaccine maker Intercell for $189 million. USANA Health Services Inc. (Nasdaq:USNA) jumped 27% after the opening, gapping higher on a takeover offer. Fuel Systems Solutions Inc. (Nasdaq:FSYS) soared 23% on an earnings-related lift. On the downside, NxStage Medical Inc. (Nasdaq:NXTM) was off about 20% after sloppy earnings and Consolidated Water Co. (Nasdaq:CWCO) was down about 16%, also tied to earnings news.
From a technical analysis standpoint, the Russell 2000 is trying to breakout of the recent trading range, and faces initial resistance at the upper edge of 735. From there, the next significant resistance zone is around 743. It should be noted that yesterday’s advance was accomplished on light volume, which is a minor contrary factor for the move. Still, Monday’s close at the highest level since early January effectively wipes out all of the short equity in 2008, and keeps pressure on short sellers heading toward options expirations. If small caps start to wobble today, initial support is at 730, then at 726 and 720.50.
