Small caps bounce off morning low on data
Small-cap shares started out the second half of 2008 with a dramatic downward spiral, as the Russell 2000 (NYSE:IWM) tumbled through the official 20% bear market line, endangering the bottoming premise built off the March through June rally. However, a bullish surprise on manufacturing data sparked a big recovery bounce about 30 minutes after the open. At 10:05 a.m. ET, the Russell was down 1.26, or 0.18%, at 688.40.
The fuel for today’s bearish flurry came from a familiar source: rising crude oil prices and slumping financial stocks. In addition, safe haven money flow away from equities toward credit instruments, physical instruments and cash exacerbated the stock market slide.
The ISM Manufacturing Survey, released at 10:00 a.m. ET, came out at 50.2, which was above the forecast for a reading of 48.6. The upside surprise on the ISM data sparked a sizable recovery bounce in stock index products, with the Russell 2000 shooting some eight handles off the morning lows. It should be noted that although the headline figure was a nice upside surprise for manufacturing activity, the index of prices paid climbed to 91.5, which marked the highest reading since 1979.
Just ahead of the stock market opening, crude oil prices climbed back above $143 dollars a barrel, jumping some $3 dollars from Monday’s U.S. close. The rise in energy markets sparked investor buying in gold, as the yellow metal hit 10-week highs. In addition, the U.S. dollar was taking a beating against the yen, down 0.8%, which makes commodity goods priced in dollars more attractive to Asian investors and end users.
The story in crude oil gathered steam amid heightened geopolitical tension in the Middle East, as rumors of a potential attack on Iran’s nuclear facilities by Israel remain on the front burner. Iran has threatened to take action on shipping through the Straight of Hormuz if attacked, and approximately 40% of the world’s fuel supply moves through that waterway. In addition, the International Energy Agency projected this morning that although demand for energy products would soften from the higher prices, the supply side would remain tight.
Large caps influencing morning action included several in the financial arena. NYSE Euronext (NYSE:NYX) was off 3% shortly after the opening. Morgan Stanley (NYSE:MS) and Merrill Lynch (NYSE:MER) were both down about 0.7%. Fortune Brands (NYSE:FO) tumbled more than 10% as the company lowered guidance because of the sluggish U.S. economy.
Broad market sectors absorbing selling this morning were highlighted by housewares, building products, automobile manufacturers, steel, wireless telecoms, railroads and hotels. Upside action was much less robust, but gold stocks, consumer finance, regional banks, property and casualty insurers were all finding buyers.
Individual small caps on the move include CBRL Group (Nasdaq:CBRL), which tumbled 10% after reporting comparable sales were off 1.2% for the latest four-week period. EMCORE Corp. (Nasdaq:EMKR) was down about 9%, sinking to fresh move lows after a large-volume slide in recent days. Protection One (Nasdaq:PONE) was down about 10%, reversing solid gains seen late last week. Dollar Thrifty Automotive Group (NYSE:DTG) was off more than 18% as the firm lowered forward guidance. On the upside, BSD Medical Corp. (Nasdaq:BSDM) rallied 14% without any apparent fresh news behind the move. Modine Manufacturing Co. (NYSE:MOD) jumped about 10%, gapping higher to snap a string of steep losses.
Looking at the chart picture, the market slipped through key support late Monday at 690, and a closing slide today through 688 would smash the 61.8% Fibonacci retracement line of the March through June rally. A convincing breach of that line suggests that the rally off the March bottom was corrective in nature, not bottom forming. The next key chart support zone is near 681. If the market slips through that zone, then we could see a support “vacuum” as the next major point isn’t seen until the Russell approaches 668.
