Russell 2000 lower on the day, higher on the week
Small-cap stocks took a mild dip Friday, pressured by pre-weekend profit-taking from traders who were eager to cash in on the recent upswing, by jitters over sagging consumer sentiment and by soaring crude oil prices. The Russell 2000 (NYSE:IWM) closed down 2.21, or 0.30%, at 741.17. Despite the sloppy finish Friday, small-cap shares still notched the highest weekly close of 2008.
Small-cap shares have been a leading performer of late versus large-cap index products, reminiscent of the long bull market run from 2002 to 2007 in which small-cap products paced the way toward record highs. However, the Russell 2000 did close lower Friday while the S&P 500 was up slightly, which is a mild caution sign looking ahead to next week’s action.
In addition to the aforementioned profit-taking desire, the University of Michigan consumer sentiment survey tumbled to 28-year lows for the month of May when the data was released Friday morning. The lows underscore the fragility of the recent stock market rally, especially when consumer spending funds are crimped by soaring gasoline and food prices.
Crude oil took flight Friday, climbing to nearly $128 dollars a barrel. Although some energy stocks stand to benefit from higher crude prices, for the most part these record levels are seen as an overall negative to stocks because the economy is still powered by spending. Goldman Sachs, a key investment banking and research firm, on Friday raised its price targets on crude oil, which can only send shivers down the consumer spine – especially heading toward the start of the summer holiday driving season in the United States.
The stock market appeared to push through Friday’s “double witching” options expiration without too much volatility. Once the S&P 500 moved well past the concentrated strike at 1,400 late this week, it took away some of the excitement surrounding expirations.
“Stocks appear to be consolidating through the monthly expiration of options,” Scott Fullman, analyst with WJB Capital Group, told SmallCapInvestor.com. “There has been notable strength this week in consumer stocks and implied volatility levels have dropped, with the reading for the S&P Small-cap Index down to 20.86%, the lowest since October,” Fullman said. It should be noted that extreme lows in volatility are often considered a warning signal that the market is becoming dangerously complacent, and it’s hard to ignore the fact that when these volatility levels were last seen in October 2007 the market was at a major peak.
Looking ahead to next week’s economic calendar, the big events are fairly light, highlighted by PPI data on Tuesday morning. In addition, Federal Reserve speakers are down to fewer than a handful, which should allow the market to focus on various earnings reports, money flow and chart factors.
Speaking of the charts, the breakout this week through important resistance in the 731 to 735 zone to near 6-month highs keeps equity pressure on losing short positions. However, the market has now entered another staunch resistance zone from 743 to 750 and that area probably won’t be overcome without a tussle. It should be noted that this last leg of the upswing was accomplished on very light volume, which is a contrarian element to the health of the move. However, the price action must be respected, and it would take a slide in the Russell back below 731 to truly endanger this latest rise. As for resistance next week, 743, 750 and 755 stand as the upside points to watch. On the downside, support comes in at 735, 731 and 726.
Among broad market sectors Friday, education services, home entertainment software, regional banks, home furnishing retail and apparel shares struggled. Buyers were seduced by the commodity theme — no doubt tied to the crude oil surge — with gold, metals and mining, coal, exploration and production, oil and gas drillers among the top-performing sectors.
Within individual small-cap issues, China Precision Steel Inc. (Nasdasq:CPSL) jumped 37%, gapping higher on unusually heavy volume following surprisingly stout quarterly results. Akeena Solar Inc. (Nasdaq:AKNS) jumped nearly 24% without any fresh news to spark the move. Overstock.com (Nasdaq:OSTK) rose over 13%. On the downside, Exar Corp. (Nasdaq:EXAR), gapped lower and never recovered losing almost 13% Friday tied to sloppy earnings news. Playboy Enterprises (NYSE:PLA) was down almost 8% and at 52-week lows without any apparent fresh news.
