Small caps tumble after bank rescue plan rolled out
Small-cap stocks plunged as investors engaged in a “buy-the-rumor, sell-the-fact” response to the official rollout of the bank bailout plan. After Treasury Secretary Timothy Geithner served up details on the rescue strategy stocks swooned, safe-haven flows abounded and credit default swaps widened as the hand-wringing began in earnest. At 12:22 p.m. ET, the Russell 2000 (NYSE:IWM) was down 13.40, or 2.89%, at 454.40.
Bank and financial stocks have been in rally mode in recent days in anticipation that the government would swoop in, stave off nationalization of banks, clean out bloodied balance sheets and clear the way for lending to flow freely. However, now that the plan has been unveiled, a realization that this process won’t necessarily be easy appears to have taken over investor confidence. The KBW Banking Index slumped nearly 10% at mid-session, while financial stocks in general paced the selling rout.
Bank of America Corp. (NYSE:BAC) tumbled some 14% after the Geithner press event, while Citigroup Inc. (NYSE:C) was off 10%. Regional banks, which had been a star performer on Monday, were the worst performing S&P group so far today. Small-cap bank Fifth Third Bancorp (Nasdaq:FITB) was down 16% while Zions Bancorporation (Nasdaq:ZION) was off 11%.
Outside of the Treasury market, gold stocks were about the only safe spot to park money in the wake of the bank slide move. The Gold and Silver Index was up 1.3%. Small-cap gold stock Novagold Resources Inc. (AMEX:NG) was up 4.6% at midday, while large-cap group leader Newmont Mining Corp. (NYSE:NEM) was up 1%.
Energy stocks took a dive as well, giving back morning gains amid worries that the bank plan could not provide a quick economic recovery and help restore demand for energy products. Crude oil futures slipped back below $40 a barrel, taking a cue from the slide in equities that the bank bail out plan wasn’t enough right now to spark further upside action. Commodities in general were on the defensive today, with the iPath GSCI Total Return Index (which tracks commodities, with an energy-heavy weighting) off 1.7%. Overnight, copper prices tumbled amid concerns about the global economy and today’s initial reaction to the bank bail out certainly won’t do much to quell those worries.
In addition to all the banks taking a hit, small-cap entertainment studio Lions Gate Entertainment Corp. (NYSE:LGF) tumbled 30% after the firm said revenue would miss the forecast. Dry bulk shipper Safe Bulkers Inc. (NYSE:SB) tumbled 21% after releasing earnings figures.
The sharp pullback in the Russell confirmed the overhead resistance zone approaching 474 as a key barrier for the bullish argument. Meanwhile, the index was rapidly approaching the key swingline at 450 and needed to hold above that point through afternoon trading or risk creating a major bearish pattern on the short-term picture. There is support along 449.50, then down at 442.50. If the market can mount a recovery bounce later today, then resistance comes in at 463.50.
