Wacky crude whipsaws small caps
Small-cap stocks finished out an up and down session Wednesday with a mild profit after spending much of the day getting bounced around by turbulent price action in crude oil futures. The Russell 2000 (NYSE:IWM) eventually closed up 1.54, or 0.21%, at 731.60 and is now down 4.49% for the year. The Dow closed up 0.61%, while the S&P 500 was up 0.62%. The Dow is off 13.9% for the year, while the S&P 500 is down 13.2%.
The frenetic action in crude oil overshadowed a positive story in the tech arena following upbeat results by the world’s largest computer maker and shuffled big overnight gains in Asian stocks into the backdrop as well.
Crude oil prices plunged to a morning low at $112.61, as the weekly inventory report showed a surprising increase in stockpiles, but then the market reversed course as the energy traders were uneasy with Russia’s response to a missile deal between the United States and Poland, especially with tensions rising between the U.S. and Russia over the Georgian conflict. For the day, crude oil traded in a wildly wide range between $112.61 and $117.03 and closed up $0.45 at $114.98. Goldman Sachs analysts also reiterated their call for $149 crude oil prices by the end of the year, which probably won’t sit well with long-term equity market bulls if it pans out.
The U.S. dollar remained firm against the euro despite the afternoon surge in crude oil, and a strong tone in the greenback remains a potential positive for equities — reflecting global confidence in U.S. assets, even if some of that confidence is really more a lack of faith in other economies around the world. Elsewhere on the commodity inflation front, corn, soybeans and wheat shot higher and the Commodity Research Bureau Index of 19 key physical markets rose about 0.7%.
Although financial shares performed much better today than they fared Monday and Tuesday, it was hard to look past the dramatic free fall in government-sponsored enterprises (GSE), with Fannie Mae (NYSE:FNM) collapsing 25% and Freddie Mac (NYSE:FRE) tumbling 21% as investors decided that a government bailout of the 1mortgage financing giants could crush current shareholder value. Both stocks were at their lowest levels in nearly two decades as everyone scrambled for the exit door at the same time. Despite the wipeout in GSEs, major bank stocks and many financial firms survived the day without too much pain, although the list of percentage losers in the Nasdaq was littered with small banks. Among those larger caps that endured the day were Lehman Brothers Holdings Inc. (NYSE:LEH), which started out the session like a sinking boat on news that capital raising bid in Asia had broken apart. However, LEH ended the day in the green, up 4.2%.
On the technology side of the ledger, the day started out bright as bellwether computer giant Hewlett-Packard Co. (NYSE:HPQ) topped the Street’s earnings estimate and looked to set a positive tone for all tech stocks. While HPQ did its part with a gain of 5.7% on the day, other tech issues were unable to carry the baton and the tech-laden Nasdaq 100 actually closed up only 0.2% on the session.
All eyes have been on China the last several days for the Olympic games, but even the financial world did a double take this morning when the Chinese stock market finally showed some signs of life, climbing some 7% on talk that a government stimulus plan would soon be sprung to revive sinking equities and spark the slowing economy. While the big China stock market rally provided some morning bounce to the U.S. psyche, it would probably take even more upside drama to truly capture attention on this side of the ocean.
Broad market sectors on the rise today were paced by metal and mining shares, oil exploration and production stocks, fertilizer, coal, construction materials, steel, oil and gas drillers and refiners. On the downside, thrifts and mortgage-finance firms were hammered. Sellers also flocked to motorcycle manufacturers, department stores, tire and rubber stocks, auto parts, hotels and advertisers.
Individual small caps of note included Novatel Wireless Inc. (Nasdaq:NVTL), which gapped lower and tumbled 26% to two-year lows as earnings numbers failed to impress investors. Midwest Banc Holdings Inc. (Nasdaq:MBHI) was simply one of many small banks that slumped Wednesday, shedding some 15%. In fairness, most of the biggest percentage gainers on the day were also small banks. Citi Trends Inc. (Nasdaq:CTRN) was down 12%, sinking to the lowest point since April. Alaska Air Group (NYSE:ALK) slipped 7%, uncomfortable with the rise in crude oil prices, as was the entire air carrier sector. For the day, the AMEX Airline Index was down 3.3%.
On the upside, Flotek Industries Inc. (NYSE:FTK), rallied 11%, bouncing back after setting fresh move lows Tuesday. Canadian Solar Inc. (Nasdaq:CSIQ) jumped nearly 11% and is also trying to find a support base after being in a relentless downward spiral since peaking in mid-June.
The chart picture for small caps shows some mild short-term signs of promise as the market is no longer overbought on momentum readings. In addition, key support along the 726 zone continues to turn back the sellers, and the market has done a nice job of holding above the 20-day moving average the past two sessions. Still, there is a disconcerting top made on the new highs last week, and it just so happens to correspond with the same price levels that stopped the rally back in June, so there is a potential double top in play on weekly charts. Looking at Thursday’s session, it will remain important for 726 to hold up as support; a breach of that point could set up a test of 711, although there is also some support along 720.50. On the upside, any push back above 750 would help alleviate some of the concerns about the topping patterns, but those formations are truly a “show me the money” setup that demand a breach or continual prodding in the coming days.
