Russell sinks to new move lows

Kevin Pendley | Jul 03, 2008 10:20am EDT | Comment

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Small-cap stocks turned lower, unable to sustain an opening bid. The early rise in stocks — particularly large caps, appeared to take its a cue from a surging dollar in the wake of jobs data that failed to deliver a feared knockout blow and an ECB rate hike that also didn’t crank out the worst scenario. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 10.86, or 1.61%, at 661.48. Price action in small caps was noticeably lagging large-cap index products early today, which is a caution sign for the overall market.

The ISM Non-Manufacturing Survey came out at 10:00 a.m. ET, with the headline number at 48.2, which was well below the median forecast. In addition, the prices paid index was the highest since the data began in 1997. The ISM data pushed all of the major stock index products into negative territory, wiping out the surprising opening rally after soft employment data.

This morning’s initial rally in large-cap stocks and the U.S. dollar was all about the way expectations play into the reality of news. Although the jobs report and weekly claims figures look bearish on the surface, the “whisper” numbers for the report were far worse. A similar situation was in play for the greenback, as the ECB raised rates “only” 25 bps, when the worst-case scenario called for a 50-bp rate hike.

Looking at the real details on the employment report, we see that non-farm payrolls tumbled 62,000, which was slightly worse than the median forecast for a decline of 50,000. However, the unemployment rate remained flat at 5.5% when everyone expected the rate to dip back to 5.4% — perhaps even lower. Remember last month when the market gasped with disbelief at the huge jump to 5.5% from 5%? Remember how everyone said it was a data “quirk” that seasonally counted teens too soon? Well, the Labor Department number crunchers did not deliver a seasonal adjustment “save” for the unemployment rate, which is not good news for the economy.

“The unemployment rate stayed higher in June after soaring in May. This suggests that May’s surge in joblessness was more of a catch-up to the slow rise in the prior six months than a seasonal adjustment difficulty. Regardless, over the past year the number of unemployed has increased by 1.5 million to 8.5 million and the unemployment rate has increased by one percentage point to 5.5%. In the post-World War II period, every time the unemployment rate has jumped by a full percentage point in the course of a year, the economy has slipped into recession,” Steven Wood, chief economist with Insight Economics, said in an email.

Crude oil prices spiked to new record highs overnight above $145 dollars a barrel, but did pull off those highs into the U.S. stock market opening, reacting to the recovery rally in the U.S. dollar after the ECB and jobs news. It’s hard to envision how a weekly close in crude oil at new highs ahead of a holiday weekend in the U.S. would be a good thing for equities.

Broad market sectors on the rise this morning were highlighted by aluminum, office REITS, steel, residential REITS, wireless telecoms and consumer finance. Meanwhile, managed health care stocks were taking a hit, as were semiconductors, home furnishings and fertilizers.

Tech stocks were lagging the Dow and S&P 500 this morning, and one of the stories there was chip maker NVIDIA (Nasdaq:NVDA), which tumbled 28% after lowering guidance overnight.

Individual small-cap stocks of note included Acme Packet Inc. (Nasdaq:APKT), which tumbled nearly 23%, gapping lower as the company updated its outlook and investors didn’t care for the updated picture. TranS1 Inc. (Nasdaq:TSON) also gapped lower, shedding 24% on a revenue pre-announcement that clearly disappointed. ARYx Therapeutics Inc. (Nasdaq:ARYX) fell 18%, gapping down on news that Proctor & Gamble has exercised an option to end a collaboration on a constipation drug. On the upside, Research Frontiers Inc. (Nasdaq:REFR) was up 10% without any apparent fresh news to power the rise. DemandTec Inc. (Nasdaq:DMAN) was up 8% on earnings news.

The chart picture for small caps remains bleak, with the Russell sinking through the first layer of support at 668. Below there, support is at 660, then 650. Meanwhile, resistance is at 674 and 683 if the market can generate a rally ahead of the holiday weekend.