Russell 2000 down as econ jitters overshadow crude oil slide

Kevin Pendley | Aug 04, 2008 4:47pm EDT | Comment

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Small-cap stocks stumbled Monday, pressured by concerns about the economy, spiking inflation data and jitters ahead of Tuesday’s FOMC announcement. Losses were limited by a sharp decline in crude oil prices, but it wasn’t enough to pull the Russell 2000 (NYSE:IWM) into the green. For the day, the Russell slipped 12.02, or 1.68% to 704.14.

It was an interesting day for the markets as a seller’s mentality gripped investors across nearly all major asset classes. Usually, money will flow from one area to another (like stocks into commodities) but today’s action saw commodities get hammered, even while stocks were soft, and also as credit instruments were weak.

“Mass liquidation is never good,” said Dominic Boyle, market strategist with Lind-Waldock, in an interview with SmallCapInvestor.com. “We’re seeing the biggest one-day decline in commodities since March. It’s especially troubling to see the stock market struggling in the face of steep losses in crude oil,” he said.

Boyle said that stocks were bracing for hawkish language from the Fed on Tuesday afternoon’s FOMC announcement, and that equities were also still coming to grips with the 4-year peak in unemployment reflected on Friday’s monthly employment report. Adding in the big jump in inflation from today’s personal income report only makes a tenuous situation on the economy and inflation more difficult. Even if the Fed takes a tough hawkish tone on inflation, there is some concern that it can’t really do much about it right now because of rising unemployment. “They can talk the talk, but they can’t walk the walk,” another trader said.

Boyle noted that Chinese manufacturing activity contracted last month for the first time in at least three years, and the ripple effect from a slowdown in China and sluggish activity in the United States and around the world take a toll on not just commodities, but also commodity-tied stocks. Looking at the worst performing stock sectors today clearly bore out Boyle’s point. Metals, mining, coal, fertilizer, oil exploration, oil production, steel, oil and gas drillers were the biggest losers in equities today.

Within physical goods, crude oil dominated the story with a whopping $5 dollar a barrel slide back below $120 during the session, before ending down $3.69 at $121.41. But energy wasn’t the only commodities market getting humbled today. Cocoa prices were down a stunning 8%, copper was down nearly 4% in London to 6-month lows and platinum was off 5% overseas to 5-month lows on concerns about the slumping auto industry. Even sugar plunged nearly 6% in U.S. trading today. The iPath GSCI commodity index tumbled to 3-month lows, sinking more than 3% on the day.

That said, Boyle wasn’t looking for a major top yet in commodities, especially in crude oil. “The long-term supply and demand situation hasn’t changed for crude oil. Crude will head higher again before long. It will take out the previous highs,” he said, creating enormous headwinds for equities along the way.

Even though there was a big slide in current commodity price inflation today, the market wasn’t comfortable with the recent inflation picture as seen through this morning’s personal income report. The core PCE deflator was above the forecast, and the price index was up 4.1% on a year-over-year basis, marking the highest level in 17 years. Even though personal income and consumer spending topped the forecast, there were concerns the boost was fueled abnormally by the government stimulus checks.

Among individual small-caps of note today, Union Drilling Inc. (Nasdaq:UDRL) was off nearly 15%, sinking to 4-month lows. Charlotte Russe Holding Inc. (Nasdaq:CHIC), tumbled 20%, gapping lower while sinking to fresh 52-week lows. CHIC shares are now down some 50% from the 2008 peak. FreightCar America Inc. (Nasdaq:RAIL) sank 20% as investors shunned earnings news. Lydall Inc. (NYSE:LDL) was off 18%, tied to quarterly results. On the upside, the biggest percentage mover was PeopleSupport Inc. (Nasdaq:PSPT), which rallied 25% on unusually heavy volume on news that the firm will will merge with Aegis after the latter bought PSPT for about $250 million in cash. Website Pros Inc. (Nasdaq:WWWW) had a big reversal day by setting 52-week lows, then rallying above Friday’s high, gaining 13%.

The chart picture for the Russell 2000 suggests that small-caps are still consolidating in the upper portion of the range off the bounce from the July lows. There is a congestion rectangle defined by the highs and lows from the past 10 sessions, and a breakout in either direction of that congestion carries a target move of 32 handles. The market is also stalling shy of trendline resistance from the June peak. A decisive push through either 720 on the upside, or 700 on the downside provides nice round numbers to track through the ISM non-manufacturing report and FOMC Tuesday.