Russell swept under rising commodity tide
Small-cap stocks extended the recent slide Wednesday, as rising crude oil prices, ongoing credit crunch worries and a soft “Beige Book” report on economic activity took a toll. The Russell 2000 (NYSE:IWM) shed 14.74, or 2.01%, to 717.88, the lowest daily close since May 7 and the fourth consecutive close below opening levels, which shows that the bears are winning all the intraday skirmishes lately.
The Russell also closed below the 20-day moving average for the third consecutive session on lower closes, something that has not happened since March. The 20-day moving average is often watched as a short-term trend proxy and the last two times we saw the market below that line three consecutive periods, it presaged a nasty move lower. In addition, late in the day the Russell popped through key chart support at 720.50. Decisive action below that support would suggest a technical breakdown of the recent recovery move, and carries a downside target to 690, which makes action Thursday even more important to gauge the power of this pullback.
Crude oil prices shot $7 dollars a barrel higher Wednesday as the weekly stocks report reflected a drop in U.S. inventories for the fourth consecutive week. Crude oil prices jumped to more than $138 dollars, closing in on last week’s record high that approached $140. Elsewhere in the commodities arena, corn, soybeans and wheat soared up their daily trading limits today amid flooding in the heartland. Corn prices have been making record highs, which means that consumers’ wallets are taking a hit at the gas pump and then again at the grocery store. The iPath GSCI Total Return structured note fund reversed two days of losses to notch new record highs today, reflecting the broad advance in the price of physical goods. The Commodity Research Bureau Index of 19 markets also made new record highs today. A slide in the U.S. dollar also contributed to the rise in crude oil and other commodities, with the greenback down 0.4% against the yen, and off about 0.6% versus the euro.
Stocks that are sensitive to climbing energy prices were out of favor with investors today. The Amex Airline Index tumbled to record lows, losing 6.1%, paced by Continental Airlines Inc. (NYSE:CAL), which dropped 10%. Small-cap carrier US Airways (NYSE:LCC) was off almost 15% to new record lows at $3.18, a far cry from the peak above $63 back in November 2006. Package couriers with high gasoline input costs like United Parcel Service (NYSE:UPS) and FedEx (NYSE:FDX) also took a beating today, with FedEx off 3.1% and UPS down 2.5%.
Federal Reserve Vice Chairman Donald Kohn joined in on the Fed’s recent inflation saber-rattling, saying that “an appropriate monetary policy following a jump in the price of oil will allow, on a temporary basis, both some increase in unemployment and some increase in price inflation.” The Fed’s recent focus on inflation has stirred comments from some analysts and economists that central bankers are already boxed into a tight corner and that sluggish economic conditions and rising unemployment simply won’t allow the Fed to raise interest rates on the timeline that credit futures suggest (75 bps in Fed funds by year-end).
The afternoon “Beige Book” report on economic activity compiled by the Federal Reserve suggested that the economy continued to struggle in April and May, with the slumping housing market the primary culprit, but also aggravated by the credit market. Consumer spending is sluggish and commercial construction is softening, said Steven Wood, chief economist with Insight Economics, in an email. Wood noted that higher food and energy costs have pinched consumers despite some pass-through of these costs noted in the report. “This report indicates that the FOMC will hold policy stead at the conclusion of their meeting in two weeks. Although the downside risks to growth have not changed, the upside risks to inflation have deteriorated somewhat,” Wood said.
Financial stocks were beaten up Wednesday as the credit crunch issue remains in play. Merrill Lynch (NYSE:MER) shares hit a 52-week low, tumbling 5.6% as the company’s CEO said the investment bank was raising capital. Also, Lehman Bros. (NYSE:LEH) shares shed another 11% as the brokerage firm was the target of an analyst downgrade. Lehman Bros. stock has now crumbled almost 50% from the May peak after assuming the lead spotlight on the revolving credit crisis magnifying glass.
Small caps taking a dive Wednesday included Central Garden & Pet Co. (Nasdaq:CENT), which collapsed some 37%, gapping lower, never recovering and essentially giving back nearly all of a doubling in value since mid-April. Hooker Furniture Corp. (Nasdaq:HOFT) stumbled nearly 14% after reporting sloppy earnings figures. Sonic Solutions (Nasdaq:SNIC) was off about 12%, also pulled down by soft quarterly results. Bucking the overall market downdraft, TGC Industries Inc. (Nasdaq:TGE) rose some 13% on unusually heavy volume, climbing to the highest level since January. Also, KMG Chemicals Inc. (Nasdaq:KMGB) rose almost 10%, gapping higher on solid earnings.
Things didn’t start out so gloomy this morning when an uptick in the latest MBA mortgage application index and news of a big acquisition by Staples (Nasdaq:SPLS) of a Dutch company was expected to bring out buyers in the stock market. Although the market hovered near steady levels early, the rising tide in crude eventually drowned out the bulls. Looking ahead to Thursday’s session, the market will face key economic data right out of the gate with the 8:30 a.m. ET release of monthly retail sales numbers. Weekly claims and import prices also come out at the same time, but the focus will likely be on retail sales. Then, at 10:00 a.m. ET, business inventory figures will come out, but that report also figures to be overshadowed by the earlier retail sales data.
