Small cap carnage amid soft earnings, soaring crude
The Russell 2000 (NYSE:IWM) took a hit Tuesday, tumbling 14.29, or 1.99%, to 703.71. Through much of the afternoon the index was flirting with losses beyond 2.5%, which has only happened eight times this year. Small caps bore the brunt of investor disdain, dropping more than one percentage point in excess of the Dow or S&P 500.
The sharp decline in small-cap versus large-cap issues was fueled by several factors, including concerns that small-cap banks will struggle even more so than large-cap banks through this credit crunch, as large banks have an easier time raising capital, said Nick Kalivas, vice president of financial research with MF Global, in an email.
In addition, Kalivas said that a weak dollar was positive for large caps over small caps because the larger companies tend to have more exposure to overseas customers, and a weak dollar makes their goods more attractively priced to foreign customers.
Furthermore, Kalivas said that earnings within the small-cap sector suffered relative to large caps. “Big losses were seen in AXE, OMCL and ASTE, which hurt small caps. These names are offsetting the positive news on an index basis, specifically in the S&P 600.”
Crude oil shot to record highs, just missing the $120 barrel mark. Although higher energy markets have been a boon to many stocks within the energy sector, investor fret over how higher energy costs could hurt an already sluggish economy were enough to overwhelm any bullish residue for energy sector issues.
The bullish tone in crude oil wasn’t the only physical market making noise today. Commodities in general were on a roll Tuesday. In addition to the gains in crude oil, soybeans shot 5% higher, copper was up 2.6%, and even tin prices set a record high. The Reuters/CRB Index, which tracks a broad range of commodities markets, rose 1.57% to a record high and is up a whopping 18% so far this year (up 77% over the last five years). Couple soaring energy prices with higher food prices and other fixed goods, and it makes it more difficult to stave off inflation and bolster consumer purchasing power.
Among individual small-cap issues, Omnicell (Nasdaq:OMCL) collapsed nearly 30% on heavy volume in the wake of sloppy earnings. Other notable percentage losers included TigerLogic Corp. (Nasdaq:TIGR), which tumbled 21% after seeing huge gains the previous two sessions. Amcore Financial (Nasdaq:AMFI) sank 16% and has now managed to lose about half its share value in only one week. Air Methods Corp. (Nasdaq:AIRM), an air medical transportation company, was down 6% on heavy volume after updating earnings.
Those shares bucking the selling trend today included Fuel Systems Solutions Inc. (Nasdaq:FSYS), which rose 20% after restating earnings. Zoran Corp. (Nasdaq:ZRAN) jumped 13% on earnings numbers, and Volterra Semiconductor Corp. (Nasdaq:VLTR) charged 18% on heavy volume after releasing solid earnings.
From a chart standpoint, the hard slide in the Russell 2000 certainly damaged the recent upswing. All of Friday’s gains were wiped out, and the ease with which prices declined today suggested that Friday’s buyers may have been short-term players with thin pockets. That said, the market is still within the parameters of a corrective decline, and it would take a slide through 672 to truly suggest that recent upside action was itself corrective, and not bottom forming. Still, the market stalled on this move just shy of the 38.2% Fibonacci retracement line, which gives some power to the overall long-term bearish argument. The market may need some consolidation time in here to test the range between 680 and 724. Any move above 724 would provide further validation for the bottoming argument and clear the way for 750 and 775 targets. For short-term traders bruised by today’s sharp decline, that might seem like an elusive goal.
