Steep early pullback to 7-week lows as profit woes intensify
Small-cap stocks fell hard on the opening, pulled down by losses in overseas markets, and ongoing worries about corporate profits as we move through the heart of the earnings season. At 9:52 a.m. ET, the Russell 2000 (NYSE:IWM) down 7.95, or 1.80%, at 434.90, slipping to the lowest point since Dec. 5.
Stock markets in Europe and Asia were in retreat mode overnight, which only added to the selling bias early on in U.S. trading. Across the pond, U.K. data showed the biggest economic contraction since 1980 and the first recession since 1991. The European Stoxx 600 and the Australian equity index slumped to five-year lows, which heightens worries here that major U.S. indices may need a hard retest of those key November lows.
From a charting perspective, there is mild support today for the Russell near 424, but the key downside point is now near 416, which represents a double bottom on daily charts from early December, which was the first critical bounce pullback off the rally from the November lows. If the market starts to stabilize this afternoon, then resistance will be seen approaching 440, then up near 450.
After dreadful economic data on housing starts and unemployment claims Thursday morning, today’s focus reverts back to the rush of big earnings reports. While there have been occasional bright spots like Apple and Google, most of the news has been dreary. Even when a company like General Electric Co. (NYSE:GE) meets the estimate like they did this morning, investors are leery to embrace the news. Shortly after the open, GE was down 3.6%. And more often than not lately, the profit reports are decidedly bearish, such as with Harley Davidson Inc. (NYSE:HOG) or Advanced Micro Devices Inc. (NYSE:AMD) as the motorcycle maker and chipmaker posted larger-than-expected losses after Thursday’s close.
Speaking of chipmakers, Samsung and Infineon tumbled in Asian trading, while electronics maker Sony forecast their first annual loss in 14 years.
Just like Thursday, the market appears to be keeping an eye on Washington for any bullish surprises ahead of the weekend, with details on a stimulus plan still holding potential bullish ammo. In a research report overnight, Goldman Sachs analysts cautioned that the stimulus package could lack the immediate punch that some are hoping for.
“Congress continues to make slow progress on economic stimulus legislation. However, as the size of the overall package grows, estimates of the amount of stimulus Congress will provide appear to be shrinking. Preliminary estimates imply that of the $825 billion Congress is considering, only $250 billion will make it into the economy in the current calendar year. This could still change as the package works its way through Congress, but these estimates highlight the political and practical challenges in enacting an effective fiscal package, particularly for 2009,” Goldman said in the report.
Goldman went on to say that infrastructure spending is weighted heavily in 2010 and 2011 and that tax breaks seem “unlikely” to have a meaningful impact on investment of employment.
Crude oil prices tumbled some $2 a barrel ahead of the stock market opening, which should weigh on energy stocks. Commodities in general could be pressured by a strong run in the U.S. dollar, which was up 1% against the euro, climbing toward six-week highs. Energy shares were off 2.3% early today.
Individual small caps on the move today include Wyndham Worldwide Corp. (NYSE:WYN), which tumbled 16% as the hotel operator gapped lower. Labranche & Co. Inc. (NYSE:LAB) also gapped lower as the trading floor specialist took an earnings-related hit. Sticking with the downward gap theme, Microsemi Corp. (Nasdaq:MSCC) fell 19% as the semiconductor firm also slumped after announcing quarterly results. Sims Metal Management Ltd. (NYSE:SMS) was off 15% as the metal recycling firm updated earnings. On the upside, Forestar Group Inc. (NYSE:FOR) gapped higher and gained 21% on news that the firm received an unsolicited takeover offer for a cash tender of $15 a share.
