Small caps slip on soaring crude, sour financials
Small-cap stocks opened lower, pressured by slumping financial shares, a dramatic surge in crude oil prices and a slide in the U.S. dollar. At 10:06 a.m. ET, the Russell 2000 (NYSE:IWM) was down 3.03, or 0.41%, at 728.56.
A fresh batch of economic data this morning offered a mixed bag for investors and market analysts, with weekly claims a tad better than feared, while leading indicators were worse than forecast and the Philadelphia Fed Survey came in soft, but better than expected. The leading indicators report came in at minus 0.7%, which was quite a bit worse than the forecast for a slide of 0.2%, and the indicators index fell to 101.2, the lowest reading since October 2004.
Earlier today ahead of the opening, the weekly claims report came in a little better than expected, but failed to stir much more than a brief mild bounce off overnight lows in stock index futures. The headline figure on unemployment claims was at 432,000, which was below the forecast of 440,000 and a decline from last week’s 445,000 number. The four-week moving average on claims rose to 445,750 while continuing claims dipped to 3.362 million. Even though the headline figure on weekly was a better number than feared, it should be noted that the four-week moving average was the highest since December 2001.
The early mood today has been darkened by fresh analyst downgrades within key large-cap financial stocks, as the big Street analysts take turns lowering the outlook on their competitors. This time around, Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) were the targets, and their stock slipped 1.5% and 2%, respectively, shortly after the open.
In addition, Lehman Brothers Holdings Inc. (NYSE:LEH) was down 6.3% on reports from the Financial Times that Korean and Chinese investment groups have backed away from taking a stake in the embattled Wall Street brokerage/banking firm. Also on the financial front, the collapse in government-sponsored enterprises (GSEs) on Wednesday was still a concern today. Fannie Mae (NYSE:FNM) was off 14% and Freddie Mac (NYSE:FRE) was down 19% after the GSEs tumbled to approximate 18-year lows Wednesday. Bank of America Corp. (NYSE:BAC) was down 2.8%, while Citigroup Inc. (NYSE:C) was off 3.2%.
Wednesday’s action ushered in some upbeat news out of the Asian stock market; alas, that turned out to be a fleeting flirtation as Asian stocks were soundly hammered overnight. China tumbled 3.5%, showing no follow through on the 7% rally from the previous day. Meanwhile, Japan was down 0.7%, Hong Kong off 2.5%, Taiwan down 1.7%, Australia down 1.1%, Singapore down 1.3%, South Korea off 1.7% and India down 2.9%.
Even though Asian stocks were on the slide overnight, they weren’t exactly looking for greener pastures out of the United States, as the dollar was hammered against the yen, tumbling some 1.4%, which is a big one-day move for that currency pair. In addition, the dollar was down about 0.4% against the euro. Some of the decline in the greenback was stirred by a dramatic rally in the energy market, with crude oil prices climbing some $3.5 dollars a barrel back above $119. The sharp pullback in the U.S. dollar spurred eye-catching moves in many commodity markets, with cocoa up 5.7%, sugar up 3%, cotton up 2.5%, copper up 3% and gold up about 2%.
Although energy stocks and commodity names stand to benefit from the soft dollar and rising crude oil values, the overall impact remains a negative for stocks, as higher gasoline prices will stunt consumer spending (which accounts for two-thirds of the economy). That correlation might be seen today as bellwether retailer Wal-Mart Stores Inc. (NYSE:WMT) was down 0.9% and the S&P Retail Index was down 1.0%.
Broad market sectors on the decline this morning were paced by thrifts and mortgage finance firms — a familiar theme in recent days given the rout in GSEs. Also, electronic retail shares were taking a hit, as were building products, homebuilders, consumer finance, automobile manufacturers, tire and rubber stocks and regional banks. Commodity themes dominated the bullish performers, with coal, gold, oil and gas drillers, metal and mining stocks, oil exploration and gas utility stocks all on the rise.
Individual small caps of note included Hot Topic Inc. (Nasdaq:HOTT), which tumbled 18%, gapping lower after reporting sloppy earnings. As one might expect with oil prices back north of $119, air carriers were none too happy today, with small-cappers US Airways Group Inc. (NYSE:LCC) slumping 13% and Alaska Air Group Inc. (NYSE:ALK) down 4%, building on losses from Wednesday. The AMEX Airline Index was off 6.8% and UAL Corp. (Nasdaq:UAUA) was down 15%. Despite the gloomy opening, there were some positive stories out there, with InfoGROUP Inc. (Nasdaq:IUSA) up 7.5% following news of leadership changes at the company.
The market is testing important support along the 726 zone this morning. Decisive price action below that point would further validate the recent bearish reversal top and would suggest additional downside probing toward the intraday chart reversal near 711. Along the way, another support area is evident near 720.50. On the upside, any bounce should encounter some resistance approaching 734, then 742.
