Small caps edge lower
Small-cap stocks edged lower Tuesday, pulled down by a soft tone in financial shares and a batch of downbeat economic data. The Russell 2000 (NYSE:IWM) lost 4.17, or 0.56%, to 736.57, snapping a string of three consecutive higher sessions.
The stock market was unable to recapture the buying enthusiasm that appeared to be in play overnight when stock index derivatives churned higher on yet another media report that the Federal Reserve was not on the brink of raising interest rates. On Monday, it was the Washington Post saying that Fed officials are not ready to hike rates, then The Wall Street Journal reported the same thing today to help drive the point home.
There is a sense right now that financial markets still need low interest rates to gain access to cheap money and that rising rates too soon to fight inflation could cripple any economic recovery. What’s more, we’re heading into an election and unemployment is rising, which hardly makes for an opportune time to raise interest rates.
However, the after-hours upside push from the rate story failed to gain traction during the actual trading session today. Ironically, on a day when Goldman Sachs (NYSE:GS) released upbeat earnings that topped the estimate, Goldman Sachs analysts downgraded the outlook for banks and said that the credit crisis won’t run its course until 2009. The investment banking firm lowered price targets for 14 banks and many of those banks took a hit today, including Bank of America (NYSE:BAC), which tumbled more than 3%.
In fact, financial shares were among the biggest broad market losers today, with regional banks slipping over 5%, diversified banks down about 3%, thrifts and mortgage finance firms down about 3.8%, consumer finance stocks off 3.7% and multiline insurance stocks down over 3.7%. On the upside, fertilizers, oil exploration, airlines, coal and gas utility stocks ranked among the best performers.
Even before the Goldman warning on banks, the rally was on wobbly footing. Investors tried to ignore a batch of sloppy economic data this morning, but with the Producer Price Index climbing above the forecast, housing starts slumping to the lowest point in 18 years and industrial production slowing more than expected, it created a difficult backdrop to spin a bullish story.
That said, the market has been in recovery mode since bottoming on the pullback last week, and it would take a slide in the Russell 2000 back below 729 to suggest that those lows in the 717.50 zone need to be retested. On the upside, the clear key spot is still at 750, then at last week’s move highs just shy of 763.
Some traders are already trying to pry apart what impact Friday’s “quadruple witching” expirations will have on the stock market. It’s still a little early to piece together a story for expirations, but the concentrated strikes for most of the major index products are above the market, which could act as a magnet for prices if the market can hold ground ahead of Friday.
Despite a pullback in crude oil prices today to about $134 dollars a barrel, commodity stocks remained in favor with investors and several energy-related sectors pushed higher. Saudi Arabia has promised to increase output, which may have helped spark a slide in crude oil prices off record highs set Monday near $140 dollars. Still, it’s not as if crude oil prices at $134 dollars represent a break for consumers who are strapped for discretionary funds between higher gasoline pump prices and rising food costs. Even with a dip in crude oil prices today, the iPath GSCI Total Return Index was up 0.3%. This fund tracks movement in commodities, with a heavy weighting on energy and set a record high on Monday.
All one needed for a reminder about higher costs was this morning’s PPI, where the headline monthly figure came in at plus 1.4% and the year-over-year number was at plus 7.2%, which marked the eighth consecutive month above 6% — something that hasn’t happened in more than 25 years.
Among individual small caps, Infinera Corp. (Nasdaq:INFN) tumbled 26%, gapping lower on unusually brisk volume, as the firm lowered its 2008 outlook. Harris & Harris Group Inc. (Nasdaq:TINY) shed about 11% on news that the firm will sell 2.5 million shares of common stock at $6.15 a share. M/I Homes Inc. (NYSE:MHO) lost about 10% without any apparent fresh news, giving back steep gains from the previous three sessions.
On the upside, Cascal NV (NYSE:HOO) rallied nearly 12% on news that its China subsidiary signed a deal to acquire a 51% stake in a joint venture in China. Also, Spire Corp. (Nasdaq:SPIR) was up about 17%.
Looking ahead to Wednesday’s session, the market can skate along free of worries about any major economic reports, but a midday talk by Federal Reserve official Janet Yellen could spark a little volatility into the mix, especially if she decides to address inflation, the dollar or monetary policy issues.
