Russell slips as jobs glow gives way to profit-taking
Small-cap stocks edged lower Friday, unable to ride out a morning wave of bullish enthusiasm after the monthly employment report showed the U.S. labor market was struggling, but not nearly as bad as feared. In the initial glow of the jobs release, the Russell 2000 (NYSE:IWM) surged to the highest level since early January, but was unable to thunder home on the stretch Friday afternoon, dipping 4.01, or 0.55%, to 725.74.
Although the sloppy close in equities may have taken some of the excitement out of this week’s advance, it should still be noted that the Russell finished out Friday at the highest weekly level since early February. There are very few shorts holding index profits in this market, and if the Russell can sustain upward momentum, those shorts will be forced to buy their way out of losing trades in the weeks ahead.
Back to the actual employment report this morning, the headline figures — the unemployment rate and the payroll number — were both much better than forecast, with the unemployment rate coming in at 5%, compared with the average guess of 5.2%, while the payroll loss for April was reported at 20,000 jobs, compared with the median estimate of an 80,000-job decline.
“The unemployment rate dropped in April because of a temporary surge in household jobs,” Steven Wood, chief economist with Insight Economics, said in an email. “However, the unemployment rate will climb further over the next several quarters as the economy continues to slowly deteriorate.”
Wood clearly believes that the U.S. economy is not exactly free and clear of further downside risk and with consumers struggling against sinking home values, rising energy and food costs, caution seems quite reasonable looking forward. Looking ahead to next week’s economic calendar, the market won’t have to navigate nearly the same level of event risk that was in play this week. In fact, most of the economic releases for next week are for March data, and the highlight will likely be the ISM Non-Manufacturing Survey (April data) that comes out Monday morning. The relatively quiet data front next week should allow investors to focus attention on the latest batch of earnings, company news, macroeconomic developments and chart patterns.
Regardless of whether or not investor trepidation over future economic data played a role in the subdued stock market finish today, the U.S. dollar held stubbornly onto solid gains against the euro and the yen, and a revival in the greenback’s fortunes would seem to be a potential boon to equities. It was impressive to see that the dollar held firm despite a jump in crude oil prices, which climbed nearly $4 dollars a barrel today as Turkish bombing raids in Northern Iraq sparked some risk premium buying into energy prices.
Within broad stock-market sectors, pretty much any of the groups that took a hit Thursday were back in favor today, with coal, aluminum, oil and gas drillers, gold, metals and mining among the best performers. The worst sectors were auto parts, paper and education services.
Among individual small-cap shares, Town Sports International (Nasdaq:CLUB) jumped 27% on positive earnings news. Meanwhile, AgFeed Industries Inc. (Nasdaq:FEED) reversed a recent slide and shot 20% higher Friday while announcing the completion of an acquisition of China hog farms. Applied Signal Technology (Nasdaq:APSG) gapped higher and charged 16% on heavy volume amid news of a change in leadership for the company. Moldflow Corp. (Nasdaq:MFLO) has been a big rally since late January and tacked on another 11% today while gapping higher on heavy volume on news that the company will be acquired by Autodesk Inc. (Nasdaq:ADSK).
On the downside, Asta Funding Inc. (Nasdaq:ASFI) collapsed another 33% today on heavy volume. The company, which has been sinking like a rock for months, was valued at $38 back in November, but is now down to $10. INVESTools Inc. (Nasdaq:SWIM) sank some 31% today on heavy turnover amid news of an SEC inquiry and analyst downgrades. Magma Design Automation (Nasdaq:LAVA) tumbled 26% on a gap lower, heavy volume move tied to sloppy earnings.
From a technical analysis perspective, the Russell 2000 closed out the week above key long-term resistance just shy of 725, and also tested a double top on daily and weekly charts at 731 which dates back to early February. For now, the retreat off intraday highs would have to be labeled as a failure of that 731 zone, and it remains a key point to watch in next week’s action. From here, the market has resistance at 731, 735 and 743, while support is pegged at 724, 720.50 and 708. Sustained action above 725 would help validate the bottoming process that has been in motion since the March lows.
