Small caps tumble as crude oil rumbles
Small-cap stocks edged lower Thursday, unable to overlook a dramatic rally in crude oil prices and ongoing concerns about financial stocks. The Russell 2000 (NYSE:IWM) closed down 6.35, or 0.8%, at 725.25 and is now down 5.3% for the year. Small caps lagged the performance in the Dow and S&P 500, but were on a similar track to the Nasdaq Composite for much of the day. The Dow gained 0.1%, and is down 13.8% for 2008, while the S&P 500 was up 0.2% and is down 12.9% on the year.
The big story today was the energy market, with crude oil prices soaring some $5 dollars, or more than 5% a barrel back above the $120 barrier, while generating the largest one-day gain in about two months. If previous price action was any indicator, the stock market starts to get very queasy when crude oil prices rise above $130 dollars a barrel. When Goldman Sachs reiterated its call this week for $149 crude by year’s end, it sent shivers through consumer goods stocks, which stand to get the short end of the consumer stick if everyone has to start paying more than $4 a gallon at the pump — especially if food price inflation kicks into gear.
The Commodity Research Bureau Index went absolutely nutty Thursday, jumping 3.7%. This index of 19 physical markets covers more than just the energy component, and the rise in commodity prices today wasn’t just a one-trick pony. For instance, coffee was up 6%, sugar was up 3%, cotton was up 2.7%, silver shot up 5%, gold was up nearly 3% and copper jumped some 4%. The market has been trying to shrug off recent inflation reports on consumer and producer prices as “dated” pointing to the sharp slide off the highs in crude oil prices, but with commodities back on the prowl, it might make it more difficult to explain away the data next time around.
A big component of the surge in commodities on Thursday was tied to a sudden reversal in fortune for the U.S. dollar. The mighty buck had been on an impressive bullish charge in recent days, soaring to multi-month highs against the yen, pound sterling, the euro and a host of other currency markets, but went into a tailspin today, tumbling some 1.1% against the yen and over 0.9% versus the euro. Many of the world’s commodity markets — including crude oil — are priced in dollar terms, so if the greenback takes a dive it makes those goods cheaper, and in more demand. Sometimes it seems as if the two markets feed off each other, and it’s difficult to tell which one is the dog, and which one is the wagging tail.
With crude oil going bonkers the last couple of days (crude slipped to $112 just a day ago) a fresh batch of economic data this morning was somewhat lost in the mix. Still, there was some relief on the data front, with weekly claims backing off recent six-year highs and the Philly Fed Survey beating the estimate. Putting things in perspective, however, the four-week moving average on unemployment claims is still at the highest level in nearly seven years, and the Philly Fed number still suggest contraction in the Mid-Atlantic manufacturing and factory scene. The leading indicators report also came out today, and it was quite a bit below the forecast, throwing a little bit of cold water on any of the upside glee from claims and the Philly Fed release.
Financial, banking and brokerage stocks continue to be a drag on the market, as analysts released a new spate of downgrades in the sector overnight and as investors continue to fret about another wave of debt write-downs emanating from the mortgage crisis. Speaking of the mortgage crisis, it’s not easy to set aside those concerns when the nation’s premier mortgage lending giants slumped to 18-year lows this week. Although both Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) started out the day in yet another torrid selling wave, things stabilized, with FNM up 12%, while FRE was up 2%.
Broad market sectors on the decline today included industrial REITS, automobile manufacturers, tire and rubber stocks, insurance firms, food retail stocks, motorcycle manufacturers, diversified banks and semiconductors. On the upside, coal, gold, metals and mining, casinos and integrated oil and gas companies managed to push higher. As we get closer to month-end, it’s interesting to see that the best performing sectors in August have been construction materials, home improvement retail, food distributors and general merchandise stores — those themes would seem to at risk if the crude oil market gets out of control on the upside again. For the month, the worst performing sectors have been thrifts and mortgage companies — no surprise considering the turmoil at GSEs. Insurance firms, investment banks and diverse financial services stocks have also been out of favor so far in August.
Individual small-caps on the move were highlighted by Hot Topic Inc. (Nasdaq:HOTT), which gapped lower and shed some 16% as investors weren’t too thrilled with sluggish earnings news. A similar theme played out at Bon-Ton Stores Inc. (Nasdaq:BONT), which tipped over by 14% as a lower-than-expected second-quarter loss was offset by a soft outlook. The Cato Corp. (NYSE:LCTR) slipped 9%, gapping lower in the wake of quarterly results. Big energy names helped lift large-cap stock indices, and in the small-cap domain, SemGroup Energy Partners LP (Nasdaq:SGLP) surged 18%, but is still looking up a dramatic freefall in the stock from the $26 zone earlier this summer. SGLP is now trying to crack the $10 barrier.
The chart picture for the Russell continues to look top-heavy following last week’s rejection of new move highs, which set up a potential double top on weekly charts in conjunction with the failure zone on the previous June peak. Looking at daily charts, today’s recovery bounce off the lows offers some hope for a short-term bottom, but it is tenuous at best. The market continues to poke and prod below important support in the 726 zone, but has been climbing back above that point. A decisive close below 726 would clearly open the door for an extension of the move lower, with a possible immediate target in the 711 zone. This is an important place for the market to find support from a technical analysis standpoint.
