Small caps extend rout; five-year weekly lows
Forced liquidations, fear of a global recession and a worrisome corporate profit picture sparked another stiff sell-off in small-cap stocks, capping off a bruising week that saw the Russell 2000 (NYSE:IWM) sink to the lowest close in more than five years. The Russell closed down 18.80, or 3.84%, at 471.12 and is now down 38% for 2008. The Dow is off 37% this year, while the S&P 500 is down 40%.
Anyone awake and watching the market before the opening today had to endure chilling news: stock index futures were locked limit-down, a trading halt on stock derivatives was in place, the Japanese market was down nearly 10%, Europe was off 8% and the yield on the long bond was at the lowest point since the product was issued back in 1977. It looked like the world was caving in ahead of the opening, and there were probably some sighs of relief that things weren’t even worse today than they turned out.
As it turned out, the opening news wasn’t pretty but it also wasn’t as bad as many feared. Then, the 10:00 a.m. ET existing home sales report came out much better than forecast and helped insert at least a modicum of optimism into a gloomy picture of the global economy. After all, if the housing market started this whole mess, a bottom in the home news could hint at a bottom for the rest of the crisis. For the record, existing home sales came in at 5.18 million units, way above the forecast of 4.98 million. Also, the rate climbed 5.5%, the best percentage performance in some three years for the moribund housing market. However, those gains in home sales are volume related because the inventory of unsold homes is huge, forcing sellers to swallow lower prices to move. As we saw in the RealtyTrac data earlier this week, foreclosures are at insane levels, with some one out of every 475 homes receiving foreclosure notices in September. Home sales might be bottoming, but home prices are not yet in recovery mode and the lofty number of “under water” mortgages remains a very real concern.
Today’s slump also underscored the fact that the credit crisis and economic crunch we’ve been feeling in America is also very much a global problem. This morning, data in Great Britain revealed that the U.K. economy contracted for the first time in 16 years, which ignited the largest one-day slide in the pound since 1992. Emerging markets are in a full-blown crisis mode, Argentina officials are pondering taking over billions in pension funds, Asian equities and European bourses are at five-year lows and even commodity markets are in a scary freefall.
Speaking of commodities, crude oil prices plunged again today, sinking 5% to 17-month lows at $64.15 a barrel, clearly looking at other issues besides a production cut announced by OPEC leaders this morning. Still, announcing a production cut in the face of massive global stock market declines seemed like a slap in the face — the oil ministers could seemingly use some public relations help. Oil officials in Great Britain immediately termed the OPEC decision “disappointing” while White House officials said cutting production right now was “anti-market.” The story in commodities runs much deeper lately than just crude oil. The Commodity Research Bureau Index of 19 physical markets collapsed to the lowest point since January 2004 and is down more than 50% from the spring highs.
Emerging markets around the world are often heavily dependent on commodity exports for revenue and when you toss in the global credit crisis, emerging markets have been brutalized. From a stock market perspective, Russia is down 75% this year, Brazil off 47%, India down 57% and China down 65%. About the only safe place for funds lately is the U.S. dollar and the Treasury market. The greenback not only went wild versus the pound today, but also climbed 2.4% versus the euro to the highest point since October 2006. The dollar hit a peak today against the euro of 1.2500, which is a far cry from the record low below 1.6000 back in July.
Individual small caps of note today included Technitrol Inc. (NYSE:TNL), which tumbled some 35% on sloppy earnings news. Also, Ariba Inc. (Nasdaq:ARBA) was off 22%, also tied to earnings results.
The chart picture looks awful on long-term studies, but continues to tease investors with intraday “capitulation” style bounces off steep lows. Today’s daily pattern makes the third such formation we’ve seen since Oct. 10. The key next week will be whether or not the market starts to consistently trade below 500. If so, then it could establish a value ceiling for yet another leg down. The market has found buyers below 470 consistently and as long as those players aren’t crushed quickly it would help stabilize downside probing. If we extend the slide next week, then the targets become 458, then 430.
