Slumping tech shares pace pre-holiday pullback

Kevin Pendley | Aug 29, 2008 4:24pm EDT | Comment

Rating: Unrated [rate it]

Small-caps stocks drifted lower Friday, weighed down by losses in the tech sector and by troubling economic data on the personal income report. The Russell 2000 (NYSE:IWM) closed down 8.29, or 1.11%, at 739.50. The Russell finished off the month of August with a solid gain of 3.5%, but is still down 3.46% for the year. The down slipped 1.46% Friday and is down 12.9% for the year, while the S&P lost 1.37% Friday is off 12.6% for 2008.

The biggest moves today were seen in tech stocks, with the Nasdaq 100 sinking 2.22%. Dell Inc. (Nasdaq:DELL) reported a stiff loss for the quarter overnight, but what really sent shudders through the tech arena was that the number two computer maker was projecting a worldwide slowdown on tech spending. DELL shares tumbled 13% Friday, and semiconductor and chipmaker shares were also wincing as Marvell Technology Group Ltd. (Nasdaq:MRVL) slumped 4% as the firm issued a very cautious outlook for the coming quarter.

While the tech concerns set the tone for a soft day in equities, additional selling was likely inspired by the personal income report this morning, which broke a string of upside data surprises this week. The personal income figure itself was down 0.7%, well below the 0.0% forecast, and an inflation sub-index on the report was at 17 year highs. After three consecutive days of data-inspired rallies (Tuesday — consumer confidence; Wednesday — durable goods; Thursday — GDP) perhaps just a touch of lukewarm data was enough to generate some pre-weekend profit-taking.

Volume was thin all week as it became apparent many money managers were comfortable extending the upcoming holiday weekend into a bigger vacation event. The light makes it difficult to read too much into this week’s price action, and September has a very checkered history. Once everyone returns Tuesday from the holiday weekend, they will be faced with a rush of key economic indicators, culminating in the big employment report Friday morning.

A sharp morning rally in crude oil futures also tugged down the stock market, but as the day progressed, the energy market drifted back down toward steady levels … without triggering any real relief buying from equity watchers. Still, the country will brace for the landfall in a few days from Hurricane Gustav, which has already claimed some 60 lives in the Caribbean and which has prompted some of the energy production in the Gulf of Mexico to be shuttered. Approximately 25% of the nation’s crude oil production comes out of the Gulf, and another 15% of natural gas output is generated there. Commodities were down slightly today, and the dollar was up just a tad, neither having a big impact on the stock market in afternoon activity.

Individual small caps on the move today included BioFarm Medical Inc. (Nasdaq:BFRM), which tumbled 11% after notching the highest close since April on Thursday. Wind River Systems Inc. (Nasdaq:WIND) was down nearly 11% on earnings news and Alexza Pharmaceuticals Inc. (Nasdaq:ALXA) was off almost 10% without any apparent fresh news to fuel the decline. On the upside, Borders Group Inc. (NYSE:BGP) rallied 8%, extending the move triggered off earnings results from earlier this week.

The chart structure reflects an inside session pullback today in small caps on light volume, which takes quite of the edge off the decline. For the week, the Russell was up a tad, but remains looking up at daunting resistance from the recent range highs. If the market can push through that resistance, then it could trigger a wave of new buying and spook out shorts who may be anticipating yet another range failure in this zone. The key resistance points next week will be at 750, 756 and 763, while support is at 734, 726 and 720.50.