Russell slips into red as crude rally counters positive news
Small-cap stocks opened higher, but quickly slipped into negative territory, pulled down by a rally in crude oil prices, which raised a caution flag about consumer spending and inflation trends. An opening burst tied to overseas stock market gains, a firm dollar and strong tech earnings failed to gain traction, but remains a positive element in play looking forward today. At 9:57 a.m. ET, the Russell 2000 (NYSE:IWM) was down 1.28, or 0.17%, at 728.80, while the Dow was off 0.34% and the tech-laden Nasdaq 100 up 0.13%.
Tech stocks were lifted by solid quarterly results from Hewlett-Packard Co. (NYSE:HPQ) as the world’s largest computer maker topped the earnings forecast. HPQ shares were up 4.3% shortly after the open.
Crude oil prices were on the rise this morning, climbing more than $1.50 a barrel back north of $116, bolstered by Goldman Sachs analysts reiterating their forecast for $149 crude oil by the end of the year. In addition, energy prices were supported by short-covering in front of today’s weekly inventory report, which is expected to show a drawdown in crude stocks of some three million barrels. The bounce in crude oil prices was taking an early toll on airline stocks, with the AMEX Airline Index tumbling 7%, with small-cap carrier US Airways Group Inc. (NYSE:LCC) off 8%. In addition to the advance in crude oil, grains prices were called solidly higher today, despite a firm tone in the U.S. dollar.
The greenback was in rally mode overnight, rising about 0.3% against both the euro and yen, which suggests some confidence from overseas investors about the U.S. economy and U.S.-tied assets — including stocks. However, those overnight gains in the buck were trimmed after stocks turned lower.
Some confidence in equities heading into the opening was linked to a big rally overnight in the Chinese stock market, which soared 7% on talk that a government stimulus plan was in the works to bolster equities and spark a slowing economy. In addition to China, stocks in Hong Kong were up 2.1%, Taiwan up 0.9%, Australia up 1.3%, Singapore up 0.8% and India up 0.9%.
Financial shares have been in the spotlight in a very negative way so far this week as the credit crisis and massive debt write-down fears have re-emerged. Even after two days of sharp declines, those worries are still in the air, with Lehman Brothers Holdings Inc. (NYSE:LEH) pulled down by a report in the New York Post that they came up short on a bid to raise capital from Korean investors. LEH shares were off 3.8%. Also within financials, Citigroup Inc. (NYSE:C) received a “sell” recommendation overnight from Goldman Sachs analysts and was down 0.8%. Other analysts said that write-downs at Morgan Stanley (NYSE:MS) won’t handcuff the firm that badly and MS shares were basically flat.
Broad market sectors on the rise were highlighted by commodity themes, with coal topping the list. After that, metals and mining shares were up, as were oil exploration, oil equipment, steel, oil and gas drillers, integrated oil and gas, computer hardware and oil storage and transportation. Sellers were drawn to thrifts, department stores, airlines, hotels, casinos and regional banks.
Individual small caps on the move included Novatel Wireless Inc. (Nasdaq:NVTL), which gapped lower and tumbled 17% after reporting sloppy preliminary quarterly results last night. On the upside, iPCS Inc. (Nasdaq:IPCS) rallied 7% without any apparent fresh news to fuel the move.
As the day progresses, resistance for the Russell comes in at 742, then at 748 and 750. On the downside, look for critical support at 726, which halted the slide Tuesday. A breach of 726 would add a more serious layer to the recent pullback and could foreshadow a slide toward 711. The sharp pullback Monday and Tuesday helped alleviate short-term overbought conditions, but the move also coincided with a double top on weekly charts from the June peak, which is troubling.
