Russell lower on data, earnings fail to inspire
Small-cap stocks pushed lower, pulled down by soft economic data, mixed earnings news and a modest rise in crude oil prices. At 10:04 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.87, or 0.68%, at 714.32.
Tech stocks were strong relative to other index products, underpinned by strong earnings from Amazon.com (Nasdaq:AMZN), which rallied 9% early today after topping the Street’s forecast.
The stout results from AMZN were not a recurring theme this morning, however, with earnings from Dow Chemical (NYSE:DOW) and Ford Motor Co. (NYSE:F) both missing the forecast. DOW was off 0.4% and F down 3.2% on the opening.
Existing home sales for June fell 2.6% to an annual rate of 4.86 million units, which was below the forecast of 4.93 million. It marked the lowest level in 10 years and was down 15% from last year. In addition, the inventory of homes available for sale rose to 11.1 months, up from 10.8 months in the May report. The national median home price also tumbled 6.1% from last year.
Ahead of the open, data on weekly claims came in much higher than expected, painting a somber picture on the employment front. The headline figure for weekly claims was at 406,000, far above the forecast of 380,000. Continuous claims dipped slightly, but the 4-week moving average rose. The immediate response to the jobs data was a brief erosion in the U.S. dollar, a rise in Treasury markets and an extension of the dip in overnight stock derivatives. However, there was some thought that the weekly claims report was at risk for an upside surprise amid layoffs in autos, airlines and banks.
Crude oil prices were higher heading into the stock market open, climbing back above $125 dollars a barrel in a mild bounce after a steep $4 drop Wednesday that put an exclamation point on a recent $23 collapse. It’s interesting to see that open interest in crude oil futures is near 18-month lows, which suggests that hedge funds have been unwinding long oil positions.
In a research report this morning, Goldman Sachs analysts said that the pattern of out-performance in equities versus energy underperformance highlights “wrong-footed” positioning in those sectors. “As a result, short-term negative correlations between energy stocks and financial stocks, and between oil and the SPX have remained high. The fates of these asset combinations remain tightly bound together at present even if the direction has reversed brutally.” Although Goldman’s commodity research retains a long-term bullish bias for energy, they said that the recent pullback in oil potentially represents a meaningful shift in the near-term trading landscape. “Not only could it continue to force people out of sector trades, but by improving the growth/inflation trade-off it is favorable for broader equity risk. This kind of dynamic has echoes of the summer of 2006 when an inflation-driven growth scare ultimately led the way to lower oil prices and broad market relief.”
Broad market sectors on the decline this morning included semiconductor equipment, containers, homebuilders, automobile manufacturers, residential REITS, airlines and life insurers. On the upside, internet retail stocks were up, communications equipment shares were higher, as were employment services firms, coal stocks, fertilizer and gold.
Small-cap stocks on the move included Sierra Wireless Inc. (Nasdaq:SWIR), which tumbled 20% to the lowest point since January after reporting soft earnings. TechTarget Inc. (Nasdaq:TTGT) was down 19%, also tied to disappointing earnings results. NVE Corp. (Nasdaq:NVEC) was down 16%, gapping lower on soft earnings news. Sturm Ruger & Co. (NYSE:RGR) was down nearly 17% on earnings. On the upside, Vital Signs Inc. (Nasdaq:VITL) rallied 25% on news that General Electric (NYSE:GE) would buy the firm for $860 million. GSI Commerce Inc. (Nasdaq:GSIC) was up 17% after reporting solid earnings news. Cirrus Logic Inc. (Nasdaq:CRUS) rallied 25%, also on earnings news.
It’s worth noting that short-term momentum readings reached overbought status during Wednesday’s rise, so a consolidation or corrective pullback here to alleviate those overbought readings would not be a surprise. The key will be to see if the market can work off most of the overdone status via time instead of price decay. In addition, the ability to hold support at 707.50 will be important. If small caps can kick-start the rally again as the day moves on, then resistance is still in play
