Sellers still abound amid financial jitters
Small-cap stocks pushed lower again on Monday, pressured by sinking financial shares as yet another big name financial firm unveiled a capital raising effort. The Russell 2000 (NYSE:IWM) closed down 5.11, or 0.69%, at 735.26. Small caps were quite a bit weaker than large-cap stocks, narrowing the wide spreads that developed during last week’s volatile action.
For the last couple of weeks, Lehman Bros. (NYSE:LEH) has been the poster child for credit crunch concerns, and after days of speculation the firm finally announced plans to raise $6 billion in capital to shore up balance sheets. The Lehman news today sparked another bout of selling in the stock, which lost about 11% on the day. In addition, other large financial firms were pulled into the undertow, with JP Morgan (NYSE:JPM) down 7% and Merrill Lynch (NYSE:MER) off 4%. The credit concerns are not solely a large-cap issue. In fact, during most of the credit crisis, small caps have tended to suffer relative to large-caps on a perception that the large banks and other financial firms have easier access to credit lines.
Early today, small caps gathered some relief bids from a pullback in crude oil prices, which slipped some $4 dollars a barrel back below $135. Still, national pump prices popped above $4 dollars a gallon over the weekend, and it will take additional downside action in crude to spark further hope about consumer spending into the summer driving season. There also was a brief morning bid in stocks when the April pending home sales report came in up 6.3%, well above the forecast for a dip of 0.3%, but the data is for April numbers and had very little staying power with stocks.
Broad market sectors under selling pressure today were dominated by the financial theme. The biggest losers included thrifts and mortgage financial firms, diverse financial services shares, investment banking, regional banks and diversified banks. On the upside, aluminum, airlines, coal, oil and gas drillers were the top-performing stocks.
Small caps of note today included Rimage Corp. (Nasdaq:RIMG), which tumbled 21% as the firm lowered guidance for the second quarter. Maiden Holdings Ltd. (Nasdaq:MHLD) slipped 10% on heavy turnover following earnings news from Friday. Spreadtrum Communications (Nasdaq:SPRD) was off nearly 17% on an analyst downgrade. Tri Valley Corp. (TSE:TVI) was off about 4% on above-normal volume without fresh news.
On the upside, The Aristotle Corp. (Nasdaq:ARTL) jumped 12% on unusually active volume, but without news. Aristotle shares have been trading in a wide range of late almost daily. Krispy Kreme Doughnuts (NYSE:KKD) rallied nearly 9% following positive earnings and is at the highest price level since mid-December.
From a technical analysis perspective, today’s slide in the Russell 2000 pushed the market below the 20-day moving average, and we haven’t seen two consecutive daily closes below that trend indicator since mid-April. The market left bearish topping patterns on daily and weekly charts last week, and those formations will dominate the chart structure unless we see a decisive rally back above 750. Look for support Tuesday at 726, then a key level looms at 720.50. Rallies will likely find resistance at 741 and 746.50.
The fact that the market was unable to muster a better upside response after Friday’s massive downside rout left short-term momentum readings oversold was cause for concern. In many ways, investors appear to still be sorting out the potential here for stocks given a surprising jump in unemployment to 5.5% amid rising inflation.
“It is certainly unusual for the Fed to have to think about inflation while the labor market is deteriorating, but even in the early ’80s stagflation period, the Fed can only address one goal or the other, and while the unemployment rate is rising, they either cut rates or keep rates low,” Christopher Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi, said in a weekly research report. “In the early ’80s, they did not hike rates when there were downside economy risks, and we do not expect them to this time either,” he said.
Federal Reserve officials once again addressed the inflation picture today, with Dallas Fed President Richard Fisher telling CNBC that global inflation pressures are unlikely to disappear anytime soon. Also, New York Fed President Timothy Geithner said global inflation risks will probably require tighter monetary policy around the globe, with policies determined by individual location. Higher rates are not what banks want to hear right now during the credit crunch.
Looking ahead to Tuesday’s session, the market will get a chance to respond to international trade figures right off the bat. The trade data is slated for release at 8:30 a.m. ET, but typically has a much more dramatic impact on foreign exchange rates than the equities market. Speaking of foreign exchange, the dollar rebounded about 1% against the euro Monday, rejecting a push to the highest point since late April. In addition, the greenback surged about 1.3% versus the yen. The market also will look to see if overseas equities markets can stabilize after they tumbled into Monday’s open, catching up with the big losses notched in U.S. stocks Friday. China, Australia and Hong Kong markets were closed last night, but steep losses were seen in Japan, Taiwan, Singapore and Bombay trading.
