Russell retreats; new lows on auto worries, safe-haven flows

Kevin Pendley | Nov 19, 2008 1:02pm EST | Comment

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Small-cap stocks went into free-fall mode into midday trading, pulled down by worries a collapse in the nation’s auto manufacturing business could sweep into a wider problem for an economy already in the throes of recession. In addition, money continues to move out of equities and into credit instruments as investors seek safe-haven outlets to try and ride out this storm. That safe-haven mentality also takes a deeper toll on small caps, which are seen as even riskier than large-cap companies. At 12:35 p.m. ET, the Russell 2000 (NYSE:IWM) was down 20.18, or 4.51% at 427.34, hitting the lowest price since May 2003.

General Motors Corp. (NYSE:GM) was down 15% on perceptions that this week’s lobby efforts by auto executives in Washington might not yield a rescue package for embattled automakers, or that an aid deal might not get there quick enough to stem a downward spiral through automakers, parts suppliers, etc. Ford Motor Co. (NYSE:F) tumbled 21%, but with the stock trading well below $2 a share, the percentage moves are easily magnified.

Yields on benchmark 10-year notes tumbled more than 3.5% at mid-session as investors made a stampede for Treasury products to try and park cash somewhere safe. The yield on five-year notes already hit five-year lows ahead of the opening this morning. The push for safe-haven outlets has extended into the gold market, where a report from the World Gold Council today said that global demand for the yellow metal soared 18% in the third quarter. While industrial metals such as copper have been pummeled by the economic crisis, which slows demand for building materials, gold stands to benefit by panic in financials and hope from long-term gold hoarders that all these bailout programs will eventually spark inflation.

However, any hope for inflation on the horizon seems like a far-off concern, especially after today’s CPI report showed that consumer prices notched the biggest decline in 61 years of data history. In fact, the deflationary environment right now just makes Treasury products even more attractive because inflation devalues fixed income investments.

Sometimes on days like today it’s interesting to see just what companies are doing well when the rest of the market is sinking. On the small-cap front, biopharma firm Orexigen Therapeutics Inc. (Nasdaq:OREX) was up 14% without any apparent fresh news behind the move. Sanderson Farms Inc. (Nasdaq:SAFM), rallied 10% as the nation’s fourth-largest chicken producer gapped higher this morning. On the downside, Genesco Inc. (NYSE:GCO) was the big loser, shedding some 35% as stock in the shoe and hat retailer hit six-year lows. Century Aluminum Co. (Nasdaq:CENX) tumbled 31%, hitting a 52-week low. CENX peaked above $80 a share in May – now they are trading below $6.

With the Russell sinking to new bear market lows today, support becomes more difficult to identify. The next two spots that jump out are near 420, which corresponds with bullish pattern lows from March 2001; and 413.55, which was a peak back in December 2002 and now acts as support. If the market mounts another startling afternoon recovery, roadblocks for the bulls will be at 433 and 442 (the previous bottoms).