Mild dip stirs up chart worries in Russell 2000
Small-cap stocks closed slightly lower Friday, pulled down by pre-weekend profit-taking and losses in small-cap energy names as crude oil tumbled to a 15-week closing low. The Russell 2000 (NYSE:IWM) finished Friday’s action down 1.01, or 0.13% at 753.37, which stands as the third highest daily close of the year and the highest weekly close of 2008. For the first time in a while, large-cap products were noticeably firmer than small-caps, with the Dow up 0.38% Friday to 11659.90, and the S&P 500 up 0.41% at 1298.20. For the year, the Russell is down 1.65%, while the Dow is off 12.0% and the S&P 500 is down 11.5%.
Normally, crude oil price declines have been a supportive element for small-cap stocks, and while that psychology is still in play, there were enough commodity-tied small-cap shares in the red Friday to pull down the Russell relative to the Dow and S&P 500. Among broad market sectors, coal, gold, metals and mining, oil and gas drillers, oil production and steel stocks were the worst performers.
Crude oil futures finished out the week at 15-week closing lows, slipping about 1% Friday just below $114 dollars a barrel. Although there are many stocks that stand to benefit from a stabilization in crude oil price declines, the general consensus is that further downside probing in the energy market would be an overall bullish element for equities because it would free up consumer spending for other areas.
In addition, small-cap stocks have been on a roll vs. other index products, so a little breather into the weekend is no surprise. However, what is a concern is the way the market traded during Friday’s minor pullback. The Russell posted new 8-month highs in the morning, but rejected those highs to close in the red, which constitutes a bearish reversal on the charts. The market rejected a push toward 763 back on the June highs and certainly recoiled from that area once again Friday, which sends up a caution signal.
Economic data Friday was a mixed bag, with industrial production and the New York Manufacturing Survey better than forecast, but with the Michigan sentiment survey coming in just a tad below expectations. None of the reports truly carries that much power with investors, and the more powerful indicators this week – such as weekly claims and CPI – were bearish. The fact that small-caps posted 8-month weekly closing highs despite troubling economic data is impressive, but the market must drive higher quickly next week or the topping chart pattern from Friday’s slip will start to gain in importance.
The market will get more data on inflation with Tuesday’s Producer Price Index release. In addition, Tuesday serves up the housing starts report and on Thursday we’ll see the latest number on weekly claims. With the jobs picture in a troubling spot of late, every piece of data on employment has been magnified. That said, it really is a fairly tame week for economic data, which could focus attention on energy prices and the stunning rally in the U.S. dollar.
Today’s slide in crude oil futures was no doubt heavily influenced by another startling performance in the dollar. Since crude oil is priced in dollar terms around the world, a rally in the greenback makes crude oil more expensive and hence is a bearish influence on the physical price of oil. And that theme is repeated in many commodity markets, with palladium, cocoa, cotton, sugar and corn all taking a dive on Friday. The iPath GSCI Total Return commodities index slipped 1.3% Friday to the lowest point since April and the U.S. dollar soared another 137 basis points against the euro, or 0.9% to the highest point since February. The dollar also made new multi-month highs against the yen, and remains a focal point for stock market strength as a strong dollar suggests foreign demand for U.S. assets, and a confidence in the U.S. economy in comparison to other markets.
Looking at individual small-cap stocks, Mentor Graphics Corp. (Nasdaq:MENT) tumbled 26% on news that a buy-out of the firm was pulled off the table. Innophos Holdings Inc. (Nasdaq:IPHS) was off 17%, staging a sharp pullback after making new record highs earlier in the week; the stock has still nearly tripled off the January lows. Omega Protein Corp. (NYSE:OME) was down 12%, and has also struggled in recent days after making new highs earlier in the week. On the upside, Micromet Inc. (Nasdaq:MITI) rallied 25% to 52-week highs and STARR Surgical Co. (Nasdaq:STAA) was up 19%, also storming to a new 52-week peak.
As noted earlier, the chart picture here is a little top-heavy, as the market was unable to sustain the morning drive to fresh 2008 highs. A lower close when making new move highs is a bearish reversal, plain and simple. The market must push higher early next week in order to set aside the topping concerns. There is resistance around the 763 zone and support Monday at 750, 742 and 734.
