Russell hovering near flat
Small-cap stocks were unable to sustain a mild opening upside brush as support from a dip in crude oil prices was countered by concerns over the credit crunch impact on financial companies. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 0.31, or 0.04%, at 740.05.
Crude oil prices were off some $3 dollar a barrel into the U.S. stock market open, slipping below $136 dollars a barrel, a welcome sign following Friday’s dramatic surge in energy prices and national pump prices breaking the $4 barrier over the weekend.
A mild uptick in equity index prices took place after April pending home sales were reported up 6.3%, well above the forecast for a dip of 0.3%.
A big acquisition deal among large-cap insurers also boosted investor psychology. Willis Group Holdings (NYSE:WSH), the world’s third-largest insurance brokerage, announced a deal to buy rival Hilb, Rogal and Hobbs Co. (NYSE:HRH) for $1.7 billion, news that sent HRH shares soaring some 44% on the opening.
The U.S. dollar was firm versus the yen into the stock market opening, gaining some 1.3% and up about 0.5% against the euro. The greenback took a big hit late last week, as European central bankers talked up rate hikes after Fed Chairman Ben Bernanke spoke about a desire to strengthen the dollar, which told foreign exchange traders that the world’s policy leaders were not in step with each other.
Stock markets around the world took a hit overnight, catching up with the big slide in U.S. equities from Friday. Japan shares were off 2.1%, Taiwan down 1.8%, Singapore down 1.9% and Bombay slumped 3.2%. Markets in Hong Kong, China and Australia were closed for holidays. However, European stocks were tame given the global rout in play.
The fact that European stocks were able to hold together relatively well overnight supported U.S. stocks this morning, as did the oversold condition from Friday’s big slide, according to Scott Fullman, director of derivatives with WJB Capital Group. “The market has been difficult to call because of volatility and the close ties to crude oil prices,” Fullman said in a phone interview with SmallCapInvestor.com. He suggested looking at trades to hedge against a potential downturn in stocks amid a volatile outlook.
Traders will keep watch today on how embattled Lehman Bros. (NYSE:LEH) fares following news overnight that the brokerage firm will raise $6 billion capital to help shore up balance sheets. Shortly after the open, Lehman Bros. stock was down nearly 7%. Also on the financial front, banking stocks could be on the defensive following news that Lehman Bros. analysts cut profit forecasts for Citigroup (NYSE:C), Wachovia (NYSE:WB) and JP Morgan (NYSE:JPM). Also on the banking front, shares in Swiss firm UBS (NYSE:UBS) took a dive in European trading.
Another large-cap of note this morning is Apple Inc. (Nasdaq:AAPL), which was down 1.7% on the opening despite expectations for the company to announce a new upgraded version of its iPhone product. Also, shares in McDonald’s Corp. (NYSE:MCD) were up 2.4% on news of strong May sales.
Friday’s plunge in the unemployment rate to 5.5% stoked fears of a 1970s-style stagflation economy in which the economy sputters and inflation rockets higher. In a weekend research report, Goldman Sachs said, “Fear of inflation is back. Consumers and investors alike are concerned that higher commodity prices, a weak U.S. dollar and easy monetary policy are generating a self-reinforcing inflationary spiral.”
Goldman went on to say however, that while the stagflation fears are understandable, that the differences between the 1970s and today are significant enough and that the Fed has learned the lessons of the past well enough to avoid a 1970s-type of debacle.
Broad market sectors on the rise this morning included restaurants, exploration and production, aluminum and gold. On the downside, investment banking, brokerage stocks and real estate management shares were attracting sellers.
Small caps on the move included Third Wave Tech Inc. (Nasdaq:TWTI), which rallied 6% on unusually brisk volume on news that Hologic Inc. (Nasdaq:HOLX) would buy the firm for $11.25 a share, or about $580 million. Another small-cap takeover deal involved CostPlus Inc. (Nasdaq:CPWM), whose shares jumped 22% on news that Pier 1 (NYSE:PIR) would buy the firm for $48.4 million. The S&P 500 Covered Call Fund (NYSE:BEP) gapped lower and was down about 2% after reversing six-month highs Friday.
From a chart support and resistance perspective, if the Russell 2000 starts to wobble today, support is at 733.50, then down at 726. Meanwhile, resistance comes in at 746.50 and 750.
