Mild pullback for small caps as crude oil hits record high
Small-cap stocks had a relatively sleepy pullback Monday, as climbing crude oil prices and a soft dollar offset an upside surprise in economic data from the ISM Non-Manufacturing Survey. The Russell 2000 (NYSE:IWM) dipped 1.39, or 0.19%, to 724.35.
The ISM Non-Manufacturing Survey came in at 52%, which was well above the median forecast for 49.5%, but neither investors nor analysts seemed ready to say that an economic growth trend for the services sector was at hand. The report sparked a brief bid in equities when it was released, but it had very little staying power throughout the day and lost the spotlight as crude oil prices began climbing.
Crude oil prices soared to a fresh record high, zooming past $120 dollars a barrel for the first time. Crude prices have jumped about 9% from last week’s low, and remain a concern for the U.S. economy, consumer spending habits and sentiment heading toward the summer driving season.
Even before the crude oil surge, equities were on the defensive this morning following weekend news that Microsoft (Nasdaq:MSFT) had retracted a bid for Yahoo! Inc. (Nasdaq:YHOO), dulling some of the merger and acquisition hype built up by the recent Mars/Wrigley (NYSE:WWY) deal. Investors pounded Yahoo! shares, which tumbled 15% on the news.
In addition to rising energy prices, other commodity markets were on a roll Monday, with the Commodity Research Bureau Index of a broad swath of physical goods climbing 1.4%, with copper prices soaring 3% to a record peak amid supply disruptions out of Chile and a lift from the ISM data. With crude oil prices and other commodity markets on a roll, the U.S. dollar was in the doldrums, sinking about 0.4% versus the euro and about 0.5% against the yen.
It should be noted that volume both overseas and in the U.S. session was light, impacted by holidays in Japan and the United Kingdom. The soft turnover takes some of the edge off today’s decline in U.S. equities and the dollar, and means the market will need further confirmation of this downturn as the week progresses.
Bank stocks, thrifts and mortgage shares were popular targets for the bears Monday, as analyst concerns about Bank of America’s (NYSE:BAC) buyout of Countrywide Financial Corp. (NYSE:CFC) sparked selling. Countrywide tumbled 15%, Bank of America was down about 1.8% and insurer American International Group (NYSE:AIG) took a 3.4% hit.
Other broad market sectors in the red Monday included education services, department stores, specialty stores and apparel retail shares. On the upside, wireless telecommunication stocks were up, likely lifted by news that Sprint (NYSE:S) could be a takeover target. Sprint shares were up about 12% on the talk. Other strong performers bucking the overall market decline were metals and mining, coal, steel and aluminum stocks.
Among individual small-cap stocks, HMS Holdings Corp. (Nasdaq:HMSY) tumbled about 23% on heavy volume as the market did not embrace earnings news. Zoltek Companies Inc. (Nasdaq:ZOLT) was down about 12% on unusually brisk volume as the company announced a change in management. Amerigon Inc. (Nasdaq:ARGN) was off nearly 14% on active volume with no fresh news. On the upside, Herley Industries Inc. (Nasdaq:HRLY) shot up about 23% on heavy volume as the company announced a settlement with the U.S. government on criminal and civil claims.
Federal Reserve Chairman Ben Bernanke is slated to speak tonight at 8:30 p.m. ET on mortgage delinquencies and foreclosures, which might generate a little extra volatility in the after-hours session (however, the Fed Chair is not expected to take part in any Q&A session). In addition, the market’s direction with key players in Europe and Asia back from holiday could be telling.
Today’s chart activity in the Russell was basically a non-event, although the inability to mount a return back to Friday’s post-jobs high provides some validation for Friday’s weak close. From a textbook standpoint, when the market makes new highs for a major move, but then closes lower, it is considered a topping signal. Whether or not Friday’s pullback signals a top for the move, or just a consolidation point is still to be determined. The same support levels that were on the radar screen for Monday remain in effect heading into Tuesday, with immediate support at 720.50, then at 715 and 708. On the upside, resistance is at 731, 735 and 743.
