New day, same crude story

Kevin Pendley | Jul 02, 2008 4:48pm EDT | Comment

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Small-cap stocks collapsed again Wednesday, unable to escape the glare of soaring energy prices that crimp consumer spending, raise business input costs and slice away corporate margins. The Russell 2000 (NYSE:IWM) shed 19.25, or 2.78%, to 672.34. This marked the fourth largest one-day decline of the year and the 15th decline in 2008 of 2% or more. In the end, small caps posted the lowest daily close since March 19.

Crude oil prices shot to new record highs after the weekly inventory report showed that crude stocks slipped below 300 million barrels for the first time since January. The prospect of tight stocks into a holiday weekend amid saber rattling between Israel and Iran ensured that a risk premium be priced into energy markets. In addition, spot gas prices jumped to a 30-month high, and it appears no commodity market will go without its turn in the sun. The Commodity Research Bureau Index of 19 commodity markets shot to yet another record high and is up 29% in 2008. In addition, new all-time highs were set in the small-cap commodity fund iPath GSCI Total Return Index, which is heavily weighted toward energy.

The dreary close in small caps was a far cry from this morning’s opening when rising European bank shares and talk that the capital-raising crisis had peaked fueled an opening bounce in stocks. That opening rise looked like a nice carryover sign of power in the shadow of Tuesday’s big recovery rally, but the resumption of selling fury today effectively clipped short any bottoming signs that may have been building off the bounce.

While soaring energy prices rightly gathered the lion’s share of attention during today’s collapse, bullish investors may have been scared into the cellar by this morning’s ADP National Employment Report, which showed a decline in payrolls of 79,000, the largest figure since November 2002. Although the correlation between ADP and the official Labor Department report has been unraveling of late, it’s still a scary figure ahead of Thursday morning’s big jobs release.

Back to energy, Goldman Sachs analysts lowered price targets on airlines, primarily tied to rising jet fuel costs and the Airline Index tumbled 6.6% today. Shares in AMR Corp. (NYSE:AMR) were down 4.7%, while Continental Airlines Inc. (NYSE:CAL) was down 11.2% and Delta Air Lines Inc. (NYSE:DAL) shares were off 11.3%. Small-cap carrier US Airways (NYSE:LCC) was down 2.9%.

On the large-cap front, Tuesday’s surprising darling General Motors Corp. (NYSE:GM) had a very brief run of joy when retaining its spot as the No. 1 car in America. GM’s stock tumbled 15% today after Merrill Lynch analysts warned that the iconic carmaker needs to raise $15 billion worth of capital and said that bankruptcy was “not impossible.”

U.S. Treasury Secretary Henry Paulson also cautioned that soft housing, the credit crisis in financial markets and rising energy markets could extend the sluggish economy. Equipment manufacturer Caterpillar (NYSE:CAT), often held up as an economic bellwether stock, stumbled 4.9% today. Despite the rout in many sectors, large-cap banks and investment banks were able to hold together reasonably well, with JP Morgan (NYSE:JPM) up 1.7% and Lehman Bros. (NYSE:LEH) up 6.8%.

Broad market sectors on the rise today were few and far between, with computer storage stocks up, specialized communications services higher, soft drink shares up and investment banking and brokerage stocks in the green. On the downside, steep losses were seen in coal, steel and automobile manufacturers. Also attracting sellers were home furnishings, diversified metals and mining, aluminum and railroads.

Small caps of note included Aladdin Knowledge Systems Ltd. (Nasdaq:ALDN), which collapsed 33%, gapping lower on unusually brisk volume when the information security company released disappointing quarterly results. Acura Pharmaceuticals Inc. (Nasdaq:ACUR) slumped 17% to six-month lows. Dollar Thrifty Automotive Group (NYSE:DTG) collapsed 33% as the car rental company issued a profit warning. A year ago, DTG was a $40 stock, today it closed below $4 dollars a share. Working that car rental theme, Avis Budget Group Inc. (NYSE:CAR) lost nearly 20% while making new 52-week lows as the company cautioned about quarterly results amid higher fuel costs and a decline in commercial travel.

On the upside, Schawk Inc. (NYSE:SGK) rallied 15% as the brand point management firm reported solid earnings. ORBCOMM Inc. (Nasdaq:ORBC) was up almost 12% on news that the firm added some 40,000 subscribers for the quarter.

Looking at the chart picture for the Russell 2000, today was a backbreaker for the longs as the slide smashed the bullish hammer pattern from Tuesday and also easily cracked key support along the 681 zone. There is now very little tangible chart support ahead of 668.50, and the collapse through 690 suggests that a retest of the March lows is now a very real downside possibility.