Steep opening slide on tap on slumping financials
Small-cap stocks are expected to open sharply lower, pulled down by renewed concerns within the financial sector, a reversal in crude oil prices and slumping equity markets around the world overnight. The Russell 2000 (NYSE:IWM) was off about 0.6% in after-hours trading, which would translate to an opening near 733.00.
There were wire service rumors this morning that Merrill Lynch (NYSE:MER) could issue a profit warning. Merrill Lynch shares were off 3.8% in overnight action and other investment banking houses such as Goldman Sachs and JP Morgan were both off some 1% in after-hours action. Also on the financial front, Merrill Lynch analysts are forecasting dividend cuts at several banks and lowering its price target for Wachovia (NYSE:WB), saying that bank stocks were in “capitulation” mode. Wachovia shares were down some 4% in after-hours trading. Bank of America (NYSE:BAC) shares were down more than 2% overnight.
Crude oil prices reversed course this morning after notching the largest one-day decline in a quarter Thursday. Crude oil was up more than $2 a barrel heading toward the stock market opening, rising back above $134. The rise in crude oil was accompanied by a slide in the U.S. dollar, which tumbled more than 100 basis points, or 0.7% versus the euro and was also down about 0.5% against the yen.
Stock markets around the world were on the defensive overnight, with Japan down 1.3%, Taiwan off 1.8%, Australia down 1.4%, India down 3.4%, Hong Kong down 0.2%, South Korea down 0.6%. China shares did bounce 2.7%, but that was just one down after sinking more than 7%.
Given the forecast for a steep opening drop in small-cap stocks, the Russell could test initial support at 731 in short order. Below there, support is at 726 and if things get really ugly today, then key long-term support is at 720.50. Conversely, if things turn around, resistance is pegged at 741.
