Steep small-cap slide on tap on GSE woes, crude spike
Small-cap stocks are expected to slump on the open, pulled down by the deepening crisis among government-sponsored mortgage lenders and by another steep rise in crude oil prices overnight. Stock index futures were down about 1% during after-hours trading, which would suggest an open for the Russell 2000 (NYSE:IWM) near 663.50.
The freefall in mortgage firms Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) hit a fresh crescendo overnight, with FNM shares off 37% and FRE also tumbling about 37% on a New York Times story that said the U.S. government is considering a takeover of the staggering firms as the housing slump and credit crisis take a toll. The GSE tumult will likely cast a pall over the entire financial sector, and indeed, Wachovia Corp. (NYSE:WB) was off some 8% overnight and Merrill Lynch (NYSE:MER) was down about 2.5%.
Crude oil prices shot more than $3 dollars a barrel to the $145 zone, hitting a fresh record high and recovering $10 dollars in losses from earlier this week in dramatic fashion. Energy prices shot higher the last two days amid supply concerns out of Nigeria and Brazil, and by ongoing geopolitical tension in the Middle East. The sharp upturn in crude oil coincided with a decline in the U.S. dollar, which was down about 0.3% against the euro and about 0.7% versus the yen before the international trade data was released at 8:30 a.m. ET. The slide in the dollar was then extended modestly after the trade report came out. On the data front, the Michigan sentiment survey comes out later this morning around 10:00 a.m. ET, and could spark a response in the stock market.
The drama surrounding FNM and FRE overshadowed a decent earnings release from General Electric (NYSE:GE), which gained about 1.4% overnight. GE is often seen as a nice proxy for economic health, but similar thoughts about Wal-Mart’s upbeat June sales on Thursday failed to gain traction. Other large caps of note overnight included MasterCard Inc. (NYSE:MA), which rallied 4% on news the firm will replace General Motors Corp. (NYSE:GM) in the S&P 100.
From a chart perspective, it is vital for the Russell to hold above 660 today on a weekly closing basis. A slide through that point would effectively wipe out all of the long equity and put the market on course to challenge the March lows. In a strange way, heightened volatility this week actually fits with the typical bottoming pattern, which coincided with the lows in both January and March. Look for support today approaching 661, then at 653 and 650. Meanwhile, resistance comes in at 674, 679 and 683.50.
