Small caps swoon late as sinking energy sends bulls scampering
Small-cap stocks unraveled in the final hour of trading as the weight of crumbling commodity stocks, a raft of sloppy profit reports and another batch of dreary economic data countered a sturdy performance in retail, homebuilder and bank stocks. The Russell 2000 (NYSE:IWM) closed down 14.23, or 3.14%, at 439.53, the sixth lowest daily close in more than five years. For 2008, the Russell is off 43%, while the Dow is down 37% and the S&P 500 is down 42%.
Energy shares were a major drag on the market today, with crude oil prices tumbling to the lowest level in nearly four years as energy traders fretted about a global recession which would continue to destroy the demand side of the equation. The Energy Select Sector SPDR Fund tumbled nearly 7%.
The story in commodities ran deeper than just the energy market, however. Copper prices – which are considered a key industrial metal and a proxy for economic health – slumped to the lowest closing price in more than three years, losing 5% during U.S. trading. The Commodity Research Bureau Index of 19 physical markets slipped 3.7% and made new bear market lows, a troubling development when stock market watchers are eagerly trying to find a bottom in equities. The CRB Index is now down 54% from the July peak and is at the lowest point in more than six years.
The market started out the day on shaky footing, as several prominent companies either missed profit projections or lowered guidance. In addition, several firms announced plans for sizable layoffs, a chilling thought heading into Friday’s monthly employment report. DuPont (NYSE:DD) missed the forecast badly, and said it would cut 2,500 jobs, while AT&T (NYSE:T) said it would slash 12,000 jobs. Those sobering jobs reductions came into the teeth of today’s weekly report on unemployment claims. Even though the weekly figure was below projections, the number of Americans who are out of work and forced to file for extended unemployment benefits rose to the highest point in 26 years.
Despite all the dreary news afloat, small-cap stocks actually spent much of the session in positive territory before the final hour meltdown. Homebuilder stocks, retailers and financial issues staged solid rallies most of the day, which kept small caps holding above water. The performance of retailer shares smacked of investors making a bet that a cycle spending low was in play, because the monthly same-store sales numbers that came out today were dreadful. The International Council of Shopping Centers said that November sales plunged a record 2.7% on a year-over-year basis as very few major retailers were able to generate positive sales numbers. Despite the poor returns, the S&P Retail Index gained 1.4% on the day.
The theme of a strong tone in homebuilder shares has been prominent the last few days, and remained in place today as investors hope that the new focus to lower mortgage rates will stoke activity in the downtrodden housing sector. This week’s MBA Mortgage Application Index shot up 112% to the highest point since mid-February, helping stir some of the optimism on the homebuilding front. Small-cap firms such as Centex Corp. (NYSE:CTX) and Lennar Corp. (NYSE:LEN) posted solid gains today and the ISE Homebuilders Index was up 5%.
Traders also were greeted this morning with a bevy of rate cuts around the world overnight, which should help bolster economic activity. The European Central Bank knocked 75 basis points off its benchmark lending rate, while the Bank of England trimmed 100 bps, New Zealand slashed 150 bps and Sweden’s Riksbank whacked off 175 bps.
Individual small caps on the decline Thursday included Layne Christensen Co. (Nasdaq:LAYN), which tumbled 25% as the wastewater, mineral and energy services provider reported record earnings, but apparently that didn’t impress investors. Clearwire Corp. (Nasdaq:CLWRD) fell 22% as the wireless network provider has been sinking hard and fast the past three sessions and is now back on a test of the November lows. Arena Resources Inc. (NYSE:ARD) fell 21% as the oil and gas exploration firm was hit hard by the overall energy slide today. On the upside, Smithfield Foods Inc. (NYSE:SFD) jumped 18% as the pork producer said it would meet credit obligations through fiscal 2009.
Today’s slide didn’t help the chart picture for small caps, but it really didn’t hurt that much either. The market is basically moving up and down – albeit in volatile fashion – in a range defined by last Friday’s highs and Monday’s collapse lows. Until that range is broken, then this action looks more like consolidation, and perhaps even foundation building. That means the key points to watch Friday (if we get a manic move off the jobs report) will be 473 on the upside and 416 on the downside.
