Sharp slide for Russell on crude rise, financial fire sale
Small-cap stocks ended the week with a whimper, pulled down by surging crude oil prices, an ongoing rout in financial stocks, sinking tech stocks and safe-haven money flow away from equities and into credit instruments. The Russell 2000 (NYSE:IWM) stumbled 12.10, or 1.64%, to 725.73, notching the second-largest one-day decline since June 6.
It’s probably no coincidence that the big decline exactly two weeks ago on June 6 also coincided with talk that Israel was developing plans to possibly attack Iran’s nuclear facilities, which sparked a rally in energy markets and also played into geopolitical tensions ahead of a weekend.
The reversal in crude oil prices meant that Thursday’s slide in energy markets was a very brief respite for consumer, airline and courier shares that have been mercilessly battered by soaring gasoline prices. The rise in crude oil was accompanied by a sharp decline in the U.S. dollar, which tumbled about 0.7% against both the euro and the Japanese yen.
Financial shares were under attack once again today following a downgrade in the outlook for banks by Merrill Lynch analysts. Citigroup (NYSE:C) was off 4.7%, Bank of America (NYSE:BAC) down 3.7% and Wachovia (NYSE:WB) off nearly 2%. Investment banks, brokerage firms and specialty trading houses were also under pressure, with JP Morgan (NYSE:JPM) down about 2%, Goldman Sachs (NYSE:GS) off 1.6% and Lehman Bros. (NYSE:LEH) down 1%. Small-cap firm MF Global (NYSE:MF) sank 22% and continues to reel in the face of analyst downgrades and slumping interest rate income from futures trades. Ironically, Merrill Lynch (NYSE:MER) itself was down 4.6%.
With the market taking a beating today and the crude oil market rising amid political concerns, the quarterly “quadruple witching” expirations shuffled into the background a little bit. That said, the market certainly was volatile today, be it from expirations or other factors. The NYSE said that short interest was at an all-time high, and commercial accounts have started to build a long position in futures, which is interesting at this stage.
Broad market sectors taking a hit today included automobile manufacturers, airlines, tire and rubber stocks and hotels. The AMEX Airline Index was down 7%, with small-cap carrier US Airways (NYSE:LCC) off about 11%. On the automaker front, Standard & Poor’s cautioned that it may reduce ratings on General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler. GM shares are already trading at 20-plus year lows.
Interestingly, regional banks were on the plus side of things despite the slide in overall financial stocks. Also, gold and education services shares were higher.
Small caps of note included Medis Technologies (Nasdaq:MDTL), which tumbled 27% on news that the firm was going to sell $29 million in securities. Banner Corp. (Nasdaq:BANR) slumped 16% to fresh 52-week lows without any apparent fresh news behind the slide. SMART Modular Technologies also notched 52-week lows, sinking some 14% on sloppy earnings results.
On the upside, Shengda Tech (Nasdaq:SDTH) jumped 16% on unusually heavy volume, amid news that the firm would purchase a state-owned chemical company in China and relocate operations. Cascal NV rallied about 10%, generating impressive gains for the second consecutive day following earnings news earlier this week.
Small caps staged a decent rally into the close off the lows, but the overall chart structure retains a heavy tone. The market’s recovery move off a near test of the recent lows was important, but must find follow through early next week. Sustained action below 720.50 next week would clear the way for another leg down of the move. With expirations out of the way, next week’s FOMC meeting announcement Wednesday afternoon could be the key calendar risk on the horizon.
