Small caps tumble from intraday highs
Small-cap stocks tumbled hard from intraday highs Wednesday as investors digested another rate cut by the Federal Reserve, and the statement accompanying the move. By the close, Russell 2000 (NYSE:IWM) shares were down 2.75, or 0.38%, at 716.17.
Although the overall decline for the day was tame, the slide off the FOMC peak was relatively dramatic. Small-cap stocks initially pushed higher on the rate cut news, but then descended into a freefall that saw the Russell shed 13 handles or nearly 1.8% from high to low.
The bullish capitulation seen in equities after the FOMC news could have simply been a classic case of a “buy the rumor, sell the fact” market response, especially considering that stocks pushed higher into the news. The S&P 500 Index cracked figure resistance at 1,400 shortly after the FOMC decision, but quickly joined small-cap shares on the retreat as investors shied away from the market. It’s worth noting that the Russell clearly led the overall stock market on the way down as selling enthusiasm kicked into gear about 30 minutes after the rate cut announcement.
“I think the markets were perfectly positioned for the Fed, and are now worried about the payroll report,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview with SmallCapInvestor.com. “Financial and retail shares have not confirmed the rally and this is a technical negative that may have sparked profit taking. Small caps are down mostly on a beta trade, but property casualty and regional banks are the weakest names. This may be a negative reaction to the FOMC and Cash America is off on an Ohio bill that limits interest on payday loans,” Kalivas said. He also anticipated that small caps would tread water sideways to lower heading toward Friday’s employment report, as traders would likely be unwilling to take on new risk into that release.
The abrupt slide in equities this afternoon appeared to pick up steam when the Russell tumbled through the morning lows in the 720 zone, and it looked like sell-stop orders were triggered in the S&P 500 when prices tumbled back down through 1,394, which might have accelerated the decline.
One area of concern might have been linked to the U.S. dollar, which clearly was struggling right after the FOMC announcement to maintain gains that had been in hand throughout the session. Within about 20 minutes of the rate cut news, the dollar was sinking fast against the euro, which likely caught the attention of traders in many markets. Although a firm dollar might crimp corporate sales to overseas customers, there is a sense in the market right now that a turn in the slumping dollar valuation would be a good sign for economic growth and domestic business activity.
“The FOMC has eased policy aggressively over the past seven months, both because of a weakening economy and the recent turmoil in the financial markets,” Steven Wood, chief economist with Insight Economics, said in an email. “However, some disagreement about this aggressive easing policy has begun to appear. This statement contains the hint that a pause in this rate cycle is upon us ... a pause that we think is temporary until whatever effects the fiscal stimulus package will have can be seen. Because we think the recession is still early on, we believe more rate cuts will be forthcoming.”
Until the market turned south off the FOMC news, things were going well. The morning GDP report came in above expectations, staving off the dreaded recession fear by notching a gain of 0.6% for the first quarter. In addition, the Chicago Purchasing Manager’s survey was above the market forecast, and crude oil prices were tumbling lower following a stocks report that showed a large jump in crude oil inventories.
Within broad market sectors, homebuilder shares tumbled 6%, paper and packaging stocks were down over 5% and semiconductor equipment was off more than 4%. On the upside, automobile manufacturers were up 5%, while education services gained 4% and gold shares were up about 3%.
Among individual small-cap stocks, CORUS Bankshares Inc. (Nasdaq:CORS) tumbled nearly 25% on soft earnings, while SAVVIS Inc. (Nasdaq:SVVS) gapped lower on the opening and collapsed 21% after lowering its 2008 revenue outlook, which spurred analyst downgrades. Hutchinson Technology Inc. (Nasdaq:HTCH) was off more than 15% on heavy volume on earnings results.
On the upside, Double-Take Software Inc. (Nasdaq:DBTK) rallied over 20% and gapped higher on solid earnings and Buffalo Wild Wings Inc. (Nasdaq:BWLD) climbed 19% on unusually heavy volume after earnings news.
The sharp afternoon sell-off in the Russell left a bearish outside reversal pattern on daily charts, and yet another failed attempt to conquer long-term chart resistance just shy of 725, which marks a 38.2% Fibonacci retracement of the entire bear market collapse. The market has struggled to push above that area on several occasions now, and a bearish reaction to a major news event like FOMC could enhance any concerns that the rally off March lows has been corrective in nature and not bottom-forming. Although it would take an extension of the decline down through 672 to truly endanger that bottom, the inability to crack the aforementioned Fibonacci line is cause for concern. Perhaps lost in all the FOMC news is the fact that the Russell finished off the month of April with the largest one-month point gain since May 2007.
Looking ahead to Thursday’s action, the market has another batch of economic releases to fret over ahead of the big employment release Friday morning. At 8:30 a.m. ET Thursday morning, Personal Income and Weekly Claims data will hit the newswires, and then at 10:00 a.m. ET, data on Construction Spending and the ISM Manufacturing Survey will come out. In addition, vehicle sales numbers will filter out during the session.
