Small caps sink as rising crude oil takes a toll
Small-cap stocks took a tumble Wednesday, rattled by another record high in crude oil prices which could stunt an already tenuous economic recovery in the U.S by crimping consumer spending and raising costs for businesses. The Russell 2000 (NYSE:IWM) lost 13.57, or 1.86%, closing at 716.21.
The relentless advance in crude oil prices saw the market shoot up to $123 dollars a barrel Wednesday, stoked by ongoing jitters about supply out of Africa and geopolitical tensions in the Middle East. In addition, tight diesel stocks on the weekly Energy Information Administration report fueled additional buying in the energy arena. With national pump prices around $3.50 a gallon and the summer driving season peak still ahead of us, consumers likely will be in a dour mood about the prospect of even higher prices on the horizon.
Equities got an early boost this morning into the opening when the productivity report came in above expectations, up 2.2% versus the forecast for a gain of 1.6%. The market has seen a run of recent economic numbers that have topped the projection, but with equities knocking on the door of four-month highs, it didn’t appear to be enough good news to sustain the run.
In addition, the U.S. dollar shot higher against the euro, which has been a supportive element for equities lately — on the rare instances when the greenback mounts a rise against the euro.
However, some traders saw the dollar’s gain as being more indicative of weakness in overseas economies than a reflection of true strength for the U.S. picture. “European economic data was extremely poor today,” Nick Kalivas, vice president of financial research for MF Global, said in email interview with SmallCapInvestor.com.
Kalivas noted that German retail sales missed the forecast, factory orders were softer than expected and consumer confidence in the United Kingdom took a dive. Ratings agency Fitch said that some European banks were at risk of becoming dependent on the ECB for funding, which they said was “unsustainable.”
As for the productivity data, Kalivas said the report reflected low inflationary pressure, but that the Fed already assumed that on the recent rate cut. That particular report tends to be “more for economists than traders” he said.
Looking ahead, Kalivas said that American International Group (NYSE:AIG) earnings Thursday could prove to be a directional key for the market, especially with financial shares taking a hit today. AIG was down 5.8% heading toward the close. In addition, he said that the market needs to show an ability to digest a smorgasbord of supply. “It has seen $34 billion through yesterday and is building … the mini-wave of credit improvement that may be coming to an end given recent concerns about Fannie Mae (NYSE:FNM). There is a lot of equity and debt being raised, which may be robbing the market of buying power and new issue could be choking the market,” he said.
And although recent economic reports have shown a silver lining in the storm clouds, there are still plenty of areas of concern.
“Financial market stress has receded somewhat, (but) the larger issue now is how much damage the financial market stress has inflicted on the real economy,” Asha Bangalore, an economist with Northern Trust, said in an email. “Evidence about the weak economy is trickling in with continued declines in home sales and prices. In addition, auto sales and non-auto consumer outlays show a significant setback, a severe weakness in demand for labor is visible in all employment numbers, and sharp declines in consumer confidence measures have been reported for April.”
The sharp afternoon slide in small-cap shares generated a bearish reversal formation on daily charts in the Russell 2000. The market has seen a series of reversal patterns on daily studies of late, and this type of unsettled behavior near four-month highs is a caution sign that a short-term top could be at hand. The pattern formed today is called a bearish “outside” reversal, which reflects a price range beyond the previous session and a lower close, which shows that the bears took a stand and the bulls were unwilling to put up much of a fight. The area of failure today is familiar, as the 731 zone marked a major top back in early February and has been a formidable zone again here in May.
Looking ahead to Thursday’s action, resistance is now at 720.50, 726 and the key spot is once again at 731. Until we see a daily close above that point, it will be difficult to embrace the idea that another leg up is at hand. On the downside, support for Thursday is at 708 and 700. Day traders might also keep an eye on 713.50 for signs of short-term support.
Within broad market sectors today, IT consulting shares were pummeled, losing about 9%. Other losing areas included homebuilding, insurance, thrifts and mortgage stocks. Bullish sectors were few and far between, with meager gains registered in office supplies and commercial printing stocks.
As for individual small caps, Synchronoss Technologies (Nasdaq:SNCR) tumbled some 44%, gapping lower on heavy volume when investors were not impressed with either the quarterly earnings or a company repurchase program. ExlService Holdings Inc. (Nasdaq:EXLS) lost nearly 17% after releasing quarterly results and Innovative Solutions & Support (Nasdaq:ISSC) shed over 14% without any apparent fresh news behind the slide. Powell Industries Inc. (Nasdaq:POWL) bucked the overall downtrend by climbing 16% on record quarterly earnings. Enzon Pharmaceuticals (Nasdaq:ENZN) was up 1.4% on high volume after earnings.
