Russell collapses as financials, commodities go into tailspin
Small-cap stocks fell hard Tuesday, completely wiping out Monday’s GSE-takeover advance as investors fretted about the overall state of financial companies. In addition, money also flowed out of homebuilding stocks and commodity names as traders searched for a safe-haven in credit markets. In the end, the Russell 2000 (NYSE:IWM) shed 25.57, or 3.49%, to 707.29, notching the largest one-day decline of the year by the time the dust settled. The small-cap benchmark is now down 7.6% for the year.
Although losses in the Dow today were less extreme than in the Russell 2000, sellers still were in control, with the Dow off 2.43% for the day, and down 15.3% on the year. Over in the S&P 500, the market tumbled 3.41% today and is off 16.6% for 2008.
“The GSE takeover was basically a band-aid on a gaping wound,” James Comiskey, senior market strategist with Lind-Waldock, said in a phone interview. When the Lehman meltdown took place this morning, it showed that there are systemic risks in the financial system that go beyond just bailing out mortgage underwriters. And it also brings up the question of just how many times the government can try to rescue these firms that are bleeding money from terrible business decisions, Comiskey said.
The “Lehman meltdown” Comiskey referred to was Lehman Brothers Holdings Inc. (NYSE:LEH), which collapsed 44% today amid fears that the firm was hitting a wall in raising capital to shore up losses tied to the mortgage/credit crisis. As LEH shares plummeted, Standard & Poors rating agency said it may slice Lehman’s credit rating. The rout in LEH shares simply stoked selling throughout the financial arena, with the Financial Select Sector SPDR Fund sinking 6.3%. “When the banks are throwing knives in each other’s backs, things are bloody. It makes the GSE takeover completely irrelevant,” Comiskey said.
Comiskey also pointed out that plenty of small banks were heavily invested in common and preferred stock at Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), which is basically like holding a penny stock right now. “There are banks that suddenly have 30% less money now they had a few days ago,” he said in reference to the demise of FNM and FRE shares.
If the GSE news doesn’t have the staying power to help right the housing ship, then homebuilders certainly aren’t looking at greener pastures just yet. If you think the financials looked bad today, how about the ISE Homebuilders Index, which crumbled 7.4%?
In addition, the market often has seen trends where huge losses in the financial sector were countered by gains on energy names, but that just wasn’t the case today as crude oil prices slumped to five-month lows and the Energy Select Sector SPDR Fund tumbled 6.6% to the lowest point since January. And it wasn’t just an energy story in commodities, as the Commodity Research Bureau Index of 19 physical markets slumped 1.71% to the lowest point since late January.
So, if investors couldn’t buy financials, and they couldn’t buy commodities, then where did the money go? How about into credit instruments? Treasury bonds and notes were on fire today as investors skedaddled out of equities and other riskier fare in favor of safe-haven outlets like bonds and notes. The yield on benchmark 10-year notes closed U.S. trading below 3.6% for the first time since mid-April (yields on notes move inverse to price).
It should be noted that today’s collapse in small caps also pressed the Russell 2000 back into a lower trading range on a closing basis, as the market violated 716.60 range support with force. If the market holds below 716.60 Wednesday and Thursday, then it would suggest a test of the previous range lows down in the 694 zone. When stepping back away from all recent intraday havoc, the dominant chart patterns in play on both daily and weekly studies remain bearish, and those formations have not been violated or even threatened with a bullish reversal of note at this stage of things. Looking ahead to Wednesday’s action, there is support for the Russell at 701, then at 694. Meanwhile, resistance is at 716.60, 720.50 and 726.
Among individual small caps of note today, EnerNOC Inc. (Nasdaq:ENOC) tumbled nearly 20% to the lowest point since mid-April. Meanwhile, Canadian Solar Inc. (Nasdaq:CSIQ) was down 18% to five-month lows and Dineequity Inc. (NYSE:DIN) was off some 25% as the CFO resigned. DIN shares were trading in the upper-$60 range a year ago, today they are hovering near $18. Despite the overall market gloom, there were some bright individual stories today: for example, Cardica Inc. (Nasdaq:CRDC), gapped higher and shot 29% higher on unusually heavy volume on news that FDA approval was granted for their bypass surgery product.
