Small caps slip again as home sales data disappoints
Small-cap stocks struggled again on Tuesday, unable to shrug off awful data on home sales, which were so bad they defied claims that the housing market has bottomed. Retailer shares also were a drag on the market as stores are getting a chilly reception this holiday season from consumers. The Russell 2000 (NYSE:IWM) closed down 6.44, or 1.35%, at 468.64, and is now down 39% for the year. Meanwhile, the Dow is off 37% for 2008, and the S&P 500 is down 41%, as the stock market limps into the final six trading sessions of a year that could be the worst since the Great Depression era.
With a short trading week in tow, the market is getting force-fed a sizable batch of economic data into just a two-day window. The first run of data today had mixed signals; on a positive note, consumer sentiment perked up more than expected in the latest Reuters/Michigan sentiment survey, rising to 60.1, compared with a consensus projection of 58.6. While that’s still a low reading historically, it raises some hope that sentiment is finally on an upswing.
As for the “not-so-good” economic news, the latest picture of the nation’s housing market came in much worse than feared. New home sales tumbled 2.9% to an annualized rate of 407,000 units, below the forecast of 415,000 units. But the really bad news was seen for existing home sales, which make up the lion’s share of housing activity. Existing home sales crumbled 8.6% for the worst decline in 11 years and the rate plunged to 4.49 million units – way below the projection for 4.93 million units. Even more disheartening is that the median home price fell 13.2%, the largest percentage decline in 40 years of collecting data. And it’s not like the bargain basement prices cleaned up inventory either – in fact, the supply of homes is still pegged at 11.2 months (16.7 months for condos). There are many market watchers who believe that the stock market won’t be able to find a bottom until the housing market turns around and these numbers certainly didn’t instill confidence on that front.
“Existing home sales peaked during the summer of 2005 and fell steadily through September 2007. From then through October 2008, home re-sales had been relatively flat, suggesting a bottom may have been reached. However, sales slumped again in November, reflecting the effects of the credit crunch,” Steven Wood, chief economist with Insight Economics, said in an email. “Meanwhile, the inventory of unsold homes — while declining — is still very high, putting downward pressure on both new construction and home prices. Home prices have been falling on a year-on-year basis for more than two years and, in recent months, the price declines have accelerated. As long as inventories stay very high and a high proportion of sales are distressed, prices will continue to decline. A recovery in the housing market is unlikely until home prices stabilize,” Wood said.
As one might expect given awful housing data, homebuilder shares didn’t take the news well.
In addition to the home sales reports, the market got the final revision for third-quarter GDP. The government stuck with the previous figure of a contraction in GDP of 0.5%, which is consistent with an economy in recession. Fourth quarter GDP is already predicted to be much worse. Since the GDP figure was in line with expectations, it had little impact on trading. On the docket Wednesday, market watchers will get a chance to react to personal income data, durable goods and weekly claims. A big surprise on claims would likely generate the biggest market response. As it is, economists are predicting that 550,000 people filed for unemployment claims last week, a sobering way to enter the Christmas holiday.
Homebuilders weren’t the only sectors struggling today. Retailers continue to limp through the holiday season, unable to entice enough shoppers out amid rising unemployment despite a sharp decline in gasoline prices and deep discounts in the stores. The S&P Retail Index slipped 1.4% today, and big department stores were among the weakest performers on the session. Macy’s Inc. (NYSE:M) tumbled 6.8%; small-capper Pacific Sunwear of California Inc. (Nadsaq:PSUN) was off about 9%.
Crude oil prices tumbled to a contract low today and eventually settled down $0.93 a barrel at $38.98, losing about 2.3% on the session. Even though crude oil prices remain soft amid concern about global demand, energy shares actually held up reasonable well, with the Energy Select Sector SPDR Fund up 0.2%.
One area that didn’t hold up well today was U.S. automakers. After a rugged start to the week Monday, things didn’t get any better today after credit ratings for the “Big 2” were slashed. General Motors Corp. (NYSE:GM) was down 14%, while Ford Motor Co. (NYSE:F) was off 15%. This marked one of the lowest daily closes for GM in decades as investors continue to fret that the firm is on the brink of bankruptcy, even with Friday’s $13.4 billion bridge loan from the government in hand.
Although today’s pullback in small-cap stocks might not have been an encouraging sign, the actual chart damage from the action was minimal. In essence we saw a relatively light volume, pre-holiday, inside session decline that didn’t violate any major support points. Looking ahead to Wednesday’s abbreviated session (the market closes early at noon in front of Thursday’s Christmas holiday), the key downside point to watch will be at 461. A breach of that point would open the door to a deeper pullback, especially if 450 also falls by the wayside. For now, the market is simply marking time within a range, waiting for a breakout signal in either direction. If the market starts to charge again on the upside, then the key area is to watch is from 491 up to 497.
