Small caps treading water
Small-caps stocks opened higher, but were unable to sustain the bid and slipped into the red shortly after the open. Prices were underpinned by a bounce in European banking stocks as Deutsche Bank rallied after saying they do not need to raise capital, and by analyst comments that the worst is over for European banks on the capital front. However, that support was countered by soft data on the ADP jobs report. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 0.47, or 0.07%, at 691.12.
The ADP National Employment Report showed a decline of 79,000 in payrolls, which marked the largest decline since November 2002. In addition, ADP revised last month’s gain downward to 25,000 from 40,000. When the ADP report was released about 8:15 a.m. ET, the news sparked a bounce in Treasury futures, trimmed overnight gains in the dollar against the yen and sparked a pullback in overnight gains in stock index futures. The weak ADP figures were troubling ahead of the big monthly employment report slated for Thursday morning.
Analysts at Goldman Sachs cautioned that the correlation between the ADP report and the actual Labor Department monthly employment release has not been that reliable of late. Goldman said that from January 2000 through October 2007, the ADP served up a much tighter projection of the jobs report, but since then the standard deviation has swelled.
Factory Orders came out at 10:00 a.m. ET, with the headline figure coming in at 0.6%, which was just slightly above the median forecast of 0.5%. The market had little reaction to the factory orders data.
Earlier this morning, the MBA mortgage application survey rose 3.6%, but the housing market remains on fragile footing and activity on both home sales and mortgages has been on the decline for several months.
Crude oil prices slipped into the red heading into the U.S. stock market open, hovering just below $141 dollars a barrel. Price action in the energy market was relatively stable overnight, which allowed the stock market to focus elsewhere this morning. That said, it seems unlikely that crude oil prices will see a big pullback ahead of a long holiday weekend with tensions running high in the Middle East.
Speaking of crude oil, Goldman Sachs analysts lowered price targets on airlines, primarily tied to rising jet fuel costs, but air carriers were holding up reasonably well early today. Shares in AMR Corp. (NYSE:AMR) were up 1.6%, while Continental Airlines Inc. (NYSE:CAL) was flat and Delta Air Lines Inc. (NYSE:DAL) shares were off 1.8%. Small-cap carrier US Airways (NYSE:LCC) was up 3.7%.
Stock markets around the world were mixed overnight, with European shares bolstered by the aforementioned bounce in the banking sector. India was also up 5.4%, but it should be noted that shares there are off some 30% from the 2008 peak. Singapore and China were basically flat overnight, but Japan was off 1.3%, Hong Kong down 1.8%, South Korea down 2.3%, Taiwan down 0.7% and Australia off 0.8%.
Large-cap stocks in the news this morning that could ripple through various market sectors include Yahoo! (Nasdaq:YHOO), which was up 7% on talk that Microsoft (Nasdaq:MSFT) was once again looking at making a run at Yahoo’s internet business. Starbucks (Nasdaq:SBUX) was up 1% as the coffee store king announced plans to shutter some 600 storefronts and trim workforce by 7%. Exxon Mobil Corp. (NYSE:XOM) was up 0.6% shortly after the opening following an analyst upgrade. UnitedHealth Group Inc. (NYSE:UNH) was up 5% despite the firm saying they are lowering forward guidance.
Broad market sectors on the rise this morning were highlighted by managed health care, oil exploration and production, regional banks, department stores and health-care facilities. On the downside, coal, automobile parts and office electronics were attracting sellers.
Individual small caps on the move included LCA Vision Inc. (Nasdaq:LCAV), which gapped higher and was up nearly 16%, bouncing off move lows forged in recent days. Isle of Capri Casinos (Nasdaq:ISLE) was up some 14% on earnings news, also bouncing from move lows notched Tuesday. Schawk Inc. (NYSE:SGK) rallied 17%, gapping higher on solid earnings news. SGK was yet another stock trying to recover from move lows carved out this week.
On the downside, Avis Budget Group Inc. (NYSE:CAR), tumbled 10% to new move lows as the company updated its outlook. Dollar Thrifty Group (NYSE:DTG) was down 8%, still reeling from a profit warning issued Tuesday. Aladdin Knowledge Systems Ltd. (Nasdaq:ALDN) was off 26% on soft earnings results.
The big rally off Tuesday’s lows generated a bullish pattern on daily candlestick charts and upside action today would help validate that bottoming formation. Look for resistance today on an extension of the bounce at 701 and 707.50. Any push back below 685 would endanger any bottoming theory built off Tuesday’s recovery.
