Small caps retreat on financial jitters
Small-cap shares opened in the red Tuesday, and continue to recoil in the shadow of the highs set after last week’s employment report pushed the market to a four-month peak. At 9:50 a.m. ET, the Russell 2000 (NYSE:IWM) was off 3.97, or 0.55%, at 720.37. Renewed jitters about the housing market and credit crunch appear to be in play, especially after Countrywide Financial Corp. (NYSE:CFC) took a big hit Monday and then Fannie Mae (NYSE:FNM) tumbled 3.2% on the opening after soft earnings.
Another factor weighing on the market is a firm tone in crude oil prices, which hit record highs Monday and then topped that record again this morning. Crude prices have been bid up on supply issues out of Africa and concern that conflict in Northern Iraq could endanger the pipeline in that area, but Nigeria is back to normal production after a multi-day strike and Iraq is old news. However, a prominent analyst firm reportedly raised its outlook for crude oil prices, which may have driven buyers back into the fray. It should be noted that any supply side bullish issues are being played out against a backdrop of softer demand as consumers shy away from record high pump prices ahead of the key summer driving season in the United States.
The political arena seems to have retreated a tad in recent weeks even though the Democratic race for a candidate is still up in the air. However, there are two big Democratic primaries on tap today in Indiana and North Carolina, which could draw the market’s focus back into the race for the White House.
It should be noted that the pullback Monday was accomplished on extremely light volume, which takes some of the sting out of recent selling pressure. The market was overbought on some momentum indicators after reaching the highest point since January, and a consolidation or correction is not a shock. As long as that pullback is accompanied by light volume and rallies take place on heavy volume, it will be an underlying positive element. There could also be some of the “sell in May, and go away” mentality.
Last night, Federal Reserve Chairman Ben Bernanke said that the mortgage markets were still stressed and posed a threat to the economy. He also said that “finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy.” Bernanke was speaking on the mortgage markets and foreclosure at Columbia University’s School of Business. The Bernanke comments seemed to fit in with this morning’s concern about the banking and mortgage sector. There is also quite a bit of fretting that recent stronger-than-expected economic numbers are not a sign that the economy has turned the corner and that significant risks remain on the horizon.
From a chart perspective, the Russell 2000 is hovering near important short-term support at 720.50. If that point is cracked with conviction today, then the next support point is at 715, then down at 708. On the upside, 725 and 731 are the key resistance lines to watch in today’s action. In the broad market, the S&P 500 is testing 1,400 once again, which could draw investor attention if that line is taken out with force.
The dollar was off early this morning against both the euro and the yen, which fit with the firm tone in energy markets and also was a negative element in play for U.S. equities. Commodity markets are on a roll once again, powered not only by energy markets, but also by copper, which soared to a record high on Monday.
Among sectors, the early losers included airlines, thrifts and mortgage companies and investment bank and brokerage firms. On the upside, companies tied to oil and gas storage, drilling and exploration were winners.
Concerning individual small-cap shares, DivX Inc. (Nasdaq:DIVX) gapped higher this morning, climbing about 14% on earnings boost. Cross Country Healthcare (Nasdaq:CCRN) also gapped higher and was up about 16% without any apparent fresh news to power the move. On the downside, Obagi Medical Products Inc. (Nasdaq:OMPI) was down some 20% after earnings sparked a wave of selling interest. MEMSIC Inc. (Nasdaq:MEMS) was down about 7% after posting quarterly results.
