Mild dip for Russell amid volatile intraday swings
Small-cap stocks closed lower in a topsy-turvy session that saw a morning rally snuffed out in favor of a steep midday slide, then an abrupt afternoon recovery move that must have left day traders dizzy from the volatility. In the end, the market was unable to recapture the morning bid as financial stocks were beat down by renewed fears on the credit crunch front and by safe haven money flow from stocks to bonds. The Russell 2000 (NYSE:IWM) dipped 2.01, or 0.27%, to 739.00.
For the second day in a row, the spotlight moved back to banking, brokerage and the financial sector. The poster child for today’s action was Lehman Bros. (NYSE:LEH), whose stock was hammered some 14% at one point, sinking to the lowest point since March 17 on reports that the firm might seek to raise capital. The company said it did not access the Fed’s discount window today, which helped lift the stock off the lows in the afternoon. Although there was some debate about whether or not Lehman indeed would seek to bolster their balance sheet by raising capital, some investors appeared to adopt a “sell now, ask questions later” approach to the news, remembering the fallout from the Bear Stearns collapse.
Despite lingering concerns about debt write downs tied to the credit crisis, the market actually started out on a strong note today, with the Russell climbing nearly 0.75% to the highs before stalling. At first blush, there appeared to be plenty of bullish fodder to fuel a recovery move after Monday’s big decline, as investors embraced comments from Federal Reserve Chairman Ben Bernanke, crude oil prices took a nosedive and the dollar strengthened. However, the market could not shake the credit crunch jitters that triggered the selling push both Monday and again today, and before long all the green prints in equity products had turned to a sea of red.
Bernanke addressed the dollar in a much greater scope than what the market tends to see from the head of the Federal Reserve, which got the attention of foreign exchange traders and sparked a big rally in the greenback. The dollar was trading lower against the euro ahead of the Bernanke comments, but tumbled some 200 basis points from high to low, which in turn triggered a slide in crude oil and a host of other commodity markets. This was the first public policy appearance by Bernanke in weeks, and he also said that until the housing market stabilizes that growth risk was to the downside. The rare Fed attention on the dollar left an impression with market watchers that Bernanke was focused on inflation and that rate cuts are on hold, if not concluded for this part of the cycle.
“This was one of the stronger dollar approaches we’ve seen from Bernanke. This could well mark an important turning point for the dollar. I could envision a 7% to 12% rally in the dollar against the euro in the next three to six months,” Dominic Boyle, market strategist with Lind-Waldock, said in a phone interview.
“This isn’t just fluff. There is a genuine policy concern about the devaluation of the dollar that has taken place over the last couple of years. Although it helps exports, at some point a dollar that is too weak is harmful to the economy. We might not see an immediate overnight reaction in the market, but the Fed is catching the dollar on the turn, which is good timing,” Boyle said.
Billionaire financier George Soros said today that the Federal Reserve has probably come to a limit on how much more they can slice interest rates because of weakness in the U.S. dollar. “You are caught between the prospect of recession and the prospect of inflation,” Soros said. He also said that crude oil and various other commodity markets were reaching bubble status.
The sharp slide in energy prices today provided a welcome respite for airline stocks, which were the top-performing broad market sector within S&P groups. The AMEX Airline Index was up about 3.5% on the day. Homebuilders, agricultural chemicals and general merchandise stores also attracted buyers today. The Homebuilder Index also gained about 3.5% today. Meanwhile, photo products, construction materials, tires and rubber paced the losing sectors today.
Individual small caps of note included OMNI Energy Services Corp. (Nasdaq:OMNI), which jumped about 14% without any apparent fresh news to fuel the rise. VNUS Medical Technologies (Nasdaq:VNUS) surged over 11% amid news that the firm has settled a patent litigation suit. A.C. Moore Arts and Crafts (Nasdaq:ACMR) rallied about 10%, also without any apparent news behind the move. On the downside, New Frontier Media Inc. (Nasdaq:NOOF), gapped lower on heavy volume and shed some 29% after it missed the profit forecast and suspended dividends. Layne Christensen Co. (Nasdaq:LAYN) tumbled 12% on unusually brisk turnover tied to earnings news.
Looking ahead to Wednesday’s session, the market will get a chance to react to productivity numbers right off the bat, as that data series comes out ahead of the opening at 8:30 a.m. ET. After that, the ISM Non-Manufacturing survey comes out at 10:00 a.m. ET, and Bernanke is slated to speak at Harvard at 2:00 p.m. ET. The title of Bernanke’s speech is “Economic Challenges: 1975 and Now” and there is no Q&A planned, so it seems unlikely that his appearance Wednesday will carry the same kind of market attention that unfolded today.
