Small caps absorb brunt of selling interest
Small-cap stocks opened lower and traded in a fairly narrow range during the rest of today’s session, trimming losses off the lows, but never catching up with a tame rise in the Dow and S&P 500. In the end, the Russell 2000 (NYSE:IWM) tumbled 5.39, or 0.76%, to 708.00, but an inside session dip for the small-cap index in the shadow of Wednesday’s big rise wasn’t all that unsettling.
However, if it all feels like a familiar refrain, you’re right. The Russell 2000 has now had five 3% one-day gains so far this year, and has now closed lower four times and was flat in the other instance. In essence, the market has been unable to sustain momentum off big rally days as investors are unwilling to take a stand that the worst is over for stocks. When the stock market starts to fly, investors are more willing to buy into strength and fund managers will scramble to catch up with the market. For now, the inability to sustain rallies suggests that the market is still burdened by caution. In the long haul, creating a “wall of worry” isn’t necessarily a bad thing when stocks are trying a build a foundation low, but it can create volatility, uncertainty and rollercoaster-price moves along the way.
Economic news today was less embraced by investors than what we saw during Wednesday’s big upside push. The most dynamic report came from the Philadelphia Federal Reserve, as their survey on manufacturing activity in the area came in down 24.9%, well below the market forecast which was in the minus 15 to minus 17 range. This marked the largest negative reading for the Philly Fed survey since the previous recession back in 2001, and overshadowed the Weekly Claims and Leading Indicators releases, which were basically in line with market expectations.
“The bottom line on the Philly Fed report is that manufacturing activity of mid-Atlantic-based businesses slumped again in April with broad-based weakness. The demand for manufactured products contracted, as did shipments,” said Steven Wood, chief economist with Insight Economics LLC, in an email. “Order backlogs are shrinking and should continue to put downward pressure on production over the next several months. Price pressures are intense, reflecting high energy and commodity prices. This report suggests that the national ISM Manufacturing figure will stay in contractionary territory despite the improvement in the Empire State Manufacturing Survey.”
In addition to sluggish manufacturing activity, investors likely saw that overseas stock markets didn’t exactly take the bit on yesterday’s rally in U.S. equities, which could have taken some of the bullish enthusiasm out of things. In addition, crude oil prices rose to fresh record highs near $115 dollars a barrel, and the Energy Information Administration said that a slumping economy and a dip in gasoline usage would be unlikely to deter higher prices at the pump this year — a bitter pill for many consumers as the national pump price already hit a record of $3.39 this week.
Within the small-cap sector, True Religion Apparel, Inc. (Nasdaq:TRLG) slumped about 4% today on high volume without any noteworthy fresh news. Other notable losers today included Epicor Software Corp. (Nasdaq:EPIC), which collapsed 27% on disappointing first-quarter preliminary earnings; Amcore Financial, Inc. (Nasdaq:AMFI), which posted a first-quarter loss and had its debt rating downgraded while sinking nearly 30%; and Standard Microsystems Corp. (Nasdaq:SMSC), which also posted sluggish earnings and dropped about 5%.
On the upside, Avanti Immunotherapeutics Inc. (Nasdaq:AVAN) was lifted some 16% by news that drug giant Pfizer Inc. (NYSE:PFE) would license the firm for an experimental vaccine against brain cancer. Also, Fuqi International (Nasdaq:FUQI) leaped 21% on earnings news, while Avocent Corp. (Nasdaq:AVCT) jumped almost 17% when earnings topped the estimate. Photon Dynamics Inc. (Nasdaq:PHTN) broke out to the upside after upward revising their outlook, and rallied about 8%.
Looking ahead to Friday’s session, the market will likely continue to focus on earnings results. The economic calendar is clear on Friday, and the only Federal Reserve speakers on tap are participating in a systemic risk panel in the morning, and are unlikely to address the economy.
From a chart standpoint, any push back above Wednesday’s highs at 713.41 in the Russell 2000 would open the door to test the early April peak near 720.50, and could spring the market toward major chart resistance along the 731 zone. On the downside, a weekly close below the 700 to 695 area would damage the good tidings brought on by Wednesday’s big move. We pointed it out before Wednesday’s surge, but it’s worth noting again that there has been a bullish cross in the 20- and 50-day moving averages, and the last time that took place was last autumn when the market made one last big rally toward record highs. In order for a similar run to play out here, the market will need to find buyers who are willing to take on important chart resistance the next couple of weeks.
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