Small caps struggle amid soft financials
Small-cap stocks edged lower Monday, pulled down by nagging concerns linked to the ongoing credit crunch, which weigh on small-cap financial institutions and by a record high crude oil prices. The Russell 2000 (NYSE:IWM) dipped 8.48, or 1.21%, to 689.66, generating the lowest daily close for the Russell since April 15.
Despite 10-week closing lows, price action today in small caps was relatively sleepy, with the Russell 2000 contained to an eight-handle range, compared with a 20-handle range last Thursday.
When the market opened this morning, equities were alarmed at a new record high in crude oil prices, which rose above $143 dollars a barrel overnight amid tensions between Israel and Iraq. However, crude oil was unable to sustain those new highs and actually dipped briefly into negative territory in the afternoon, leaving a potential bearish topping signal on daily charts that allowed stock market investors a little breathing room. Also on the commodities scene, gold prices pulled back today, and corn futures plunged down the daily trading limit.
Earlier this morning, the Chicago PMI headline figure came in at 49.6, which was a much better showing than the median forecast for a reading of 48. Still, the number was below the 50 contraction line for the fifth consecutive month, which underscores a soft picture in the Midwest manufacturing scene. The Chicago data was just the first of several manufacturing-oriented reports this week, but the big economic report comes Thursday morning with the monthly employment release.
For the first time in quite awhile, the Dow rallied in the face of declines in small-cap stocks. The Dow has been in collapse mode of late, sinking to 2-year lows even though the Russell 2000 was still well above the March 2008 bottom. The Dow benefited today from gains in a couple of oil company shares and from a rise in Wal-Mart (NYSE:WMT), which stands to hold up better than high-end retailers if the economy continues to struggle.
At the end of the first half of the year, small caps have been relatively stronger than large-cap index products, with the Russell 2000 down 9.9%, the Dow off 14.4%, the S&P 500 down 12.8% and the Nasdaq 100 down 11.8%. The stronger performance from small caps has been even more prominent in recent weeks as the large-cap products tended to pace the decline off the June highs.
The financial sector continues to be a drag on stocks, as the credit crunch still hasn’t steered the full course and several firms are said to be in need of raising capital to offset debt write-downs. American International Group (NYSE:AIG) was off 4.5% today, while Citigroup (NYSE:C) was off 3% and The Bank of New York Mellon Corp. (NYSE:BK) was down 2.1%. Looking at a list of the biggest percentage losers today on the Nasdaq exchange, that list is heavily populated with small banks and financial firms.
Among small-cap stocks, Tongitang Chinese Medicines Co. (NYSE:TCM) stumbled 36% on unusually heavy volume amid news that a proposed leadership takeover of the firm has been withdrawn. Redwood Trust (NYSE:RWT) slipped 15% to fresh 52-week lows and Ames National Corp. (Nasdaq:ATLO) was down 20%.
On the upside, Red Lion Hotels Corp. (NYSE:RLH) jumped 13%, gapping higher on heavy turnover on news that the firm has been approached about a takeover. Trex Inc. (NYSE:TWP) rallied 9% without fresh news and Rediff.com India Ltd. (Nasdaq:REDF) jumped nearly 20% on brisk volume, generating a huge bullish reversal by rallying back from 52-week lows.
The chart structure in the Russell 2000 retains a top-heavy bias. Short-term momentum readings such as the Relative Strength Index are oversold, which could spark a bounce, or prompt sideways action, which is what took place today. The market could be building a little bear flag formation here; if so, then a downside breakout of that pattern would take place Tuesday or Wednesday morning at the latest. The key point to watch remains just below 690, which corresponds with a 61.8% Fibonacci retracement of the entire March-June rally. A decisive breach of 690/688 would endanger the bottoming argument and could spark a retest of the March lows in the weeks to come. This is a critical spot for the market to stabilize.
The best-performing broad market sectors today came from wireless telecoms, agriculture products, coal, home entertainment software and oil and gas storage and transportation. On the downside, thrifts and mortgage firms, multiline insurance, tires and rubber and diverse financial services shares were the worst performers. With this being month and quarter-end, here are the five best- and worst-performing sectors for the second quarter:
• Coal +17%
• Gas utilities +10%
• Gold +10%
• Oil, gas storage & transportation +7%
• Brewers +6%
• Tires & rubber -30%
• Automobile manufacturers -30%
• Casinos & gambling -29%
• Thrifts and mortgage -28%
• Regional banks -28%
Looking ahead to Tuesday’s session, the market gets yet another batch of key manufacturing data in the morning, in the form of the ISM Manufacturing Survey at 10:00 a.m. ET. In addition, car sales will be reported throughout the day, and the market has already priced in gloomy news for General Motors Corp. (NYSE:GM) and Ford (NYSE:F).
