Russell slumps on crude, weak financials
Small-cap stocks pulled lower Monday, unable to escape the familiar bearish shadow of rising crude oil prices and slumping financial shares. The Russell 2000 (NYSE:IWM) tumbled 5.92, or 0.82%, to 719.81, the second-lowest daily close since early May.
Small caps were noticeably soft relative to the large-cap Dow, which found comfort from energy-related gains in Exxon Mobil Corp. (NYSE:XOM), which gained about 2.3% to play a supportive role for the Dow 30.
Speaking of energy, crude oil prices climbed about 1% past $136 dollars a barrel, a brazen show of support given the fact that Saudi Arabia pledged to increase production. However, the possibility of more supplies was lapped up amid worker strikes in Nigeria and heightened Middle East tensions following last week’s news that Israel staged a large practice military strike against Iran’s nuclear production facilities.
The U.S. dollar managed to push higher today despite the rally in crude oil prices, gaining about 0.5% against the euro and about 0.4% versus the yen. However, advances in the greenback were trimmed back from better levels seen into the U.S. stock market opening, when soft Eurozone economic data bolstered the buck.
Every new trading day seems to bring with it a new bearish scare for the battered financial sector and today’s fright du jour was a warning from influential analysts at Goldman Sachs that the credit crunch will get a “second wind” and that junk bond defaults will rise more quickly than expected. Goldman also said that regional banks in particular could struggle to make up capital losses, which hits home against small-cap index products that are laden with bank and smaller financial sector stocks.
Large-cap financial stocks taking a hit included American Insurance Group (NYSE:AIG), which was down 5% following a negative article in Barron’s. Also, Bank of America (NYSE:BAC) was off 4% and JP Morgan was down about 2.5%.
Which makes it come as no surprise that broad market sectors under water today included regional banks, thrifts and mortgage firms, diverse financial services stocks and multiline insurers. Automobile manufacturers also were taking a hit today; the AMEX Airline Index tumbled 7%. Various oil-linked stocks dominated the upside action, joined by coal and steel shares. The market was truly bifurcated today, with hefty gains seen for the “right” groups and large losses incurred on the stocks that attracted sellers.
Today’s action actually started off in a positive manner, with a big M&A deal in the agriculture arena sparking overnight enthusiasm for stock derivatives and the market talking about picking off bargains amid oversold conditions. Bunge Ltd. (NYSE:BG), a giant fertilizer and oilseed processing company, announced plans to purchase Corn Products International (NYSE:CPO) in a deal worth $4.4 billion. BG shares rallied nicely in overnight trading, benefiting from news that the company increased its earnings forecast, but turned lower shortly after the regular market open this morning and eventually shed almost 10% for the day. CPO prices rallied some 18% on the news, but closed well off the early spike high.
Among a list of biggest movers today, there were numerous small-cap banks on the docket and they were joined by Vanda Pharmaceuticals (Nasdaq:VNDA), which lost 20%, reversing gains from last week in quick order. FCStone Group Inc. (Nasdaq:FCSX) dropped some 17% to the lowest level since early April, without any apparent fresh news to fuel the slide. Also, SYMS Corp. (Nasdaq:SYMS) was down 13% on profit-taking after hitting multi-month highs last Friday.
Bucking the overall downturn in small caps, Royal Energy Inc. (Nasdaq:ROYL) rose 15% while announcing its board slate approval to drill in the Utah Uinta basin. RCN Corp. (Nasdaq:RCNI) rallied 12% on unusually brisk volume, reversing course from a steep slide late last week.
From a charting standpoint, this was a noteworthy day for small caps as the Russell 2000 closed back below key support at 720.50. The only support safeguard of note in play right now is from the recent lows near 717.50; if that area is broken down this week then it opens the door to establish a new lower range, with the downside target around 690. Persistent action below 720.50 would suggest that a rollover in prices is about to occur.
Looking ahead to Tuesday’s session, the market will get its first taste of economic data in the morning from the Case/Shiller Home Price Index and the Consumer Confidence report, which comes out at 10:00 a.m. ET, and could play a pivotal role in morning trading direction.
