Steep opening drop on tap for small caps
Small-cap stocks are expected to push lower on the opening, pulled down by residual selling after Tuesday’s rout in the financial sector and by another batch of soft earnings leading into this morning’s open. The Russell 2000 (NYSE:IWM) was off about 0.7% in overnight trading, which would translate to an opening near 731.75.
Earnings news from large-cap firms ahead of the open ramped up overnight selling interest. Morgan Stanley’s (NYSE:MS) results were actually slightly better than the forecast, and although the stock was little changed immediately after the news in after-hours trading, the shares later turned into the red. Stock index futures were tugged lower by earnings news from FedEx (NYSE:FDX), which came in slightly below the forecast. The firm had a dreadful outlook for 2009, which sparked a 5% decline in the stock in after-hours trading and which tacked on about three more handles to the downside in S&P 500 futures.
Within the financial sector theme, shares in large-cap futures firm MF Global (NYSE:MF) tumbled some 15% overnight as revenue was below the forecast and the company said it would raise capital by selling convertible securities to pay down debt.
Crude oil futures were higher overnight, climbing to the $134.50-a-barrel range and will take direction from the 10:30 a.m. ET weekly inventory data, meaning the stock market could also take a turn for the better or worse at that time as well.
The MBA mortgage applications report came in at minus 8.8% and continues to be soft in line with the difficult housing situation and an uptick in rates. The market should be able to skate through the rest of today’s session without interruption from economic data (aside from the aforementioned crude oil stocks report). However, a midday speech from Federal Reserve official Janet Yellen could stir volatility if she addresses inflation, the economic outlook or monetary policy issues.
Looking at the chart picture for today, the market could test initial support at 731 right away given the forecast for a lower opening. Below that point, support is at 726, then the major chart point is at 720.50. If the market can stabilize and turn higher, resistance is at 741, 746.50 and the big upside point comes in at 750. Although recent peaks and valleys have been outside 750 and 720, a breakout from that range is still the key.
