Another collapse for small caps as energy stocks get smashed

Kevin Pendley | Nov 20, 2008 4:19pm EST | Comment

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Small-cap stocks extended the bear market collapse Thursday, tumbling to the lowest point since May 2003 as a familiar combination of awful economic data and flight-to-quality money flow was accentuated by a rout in energy stocks. The market generated an impressive midday recovery to positive territory on oversold conditions and erratic bargain hunting but failed to sustain the move. In the end, the Russell 2000 (NYSE:IWM) closed down 27.07, or 6.56% to 385.31. Small caps are now down 50% for 2008, while the Dow is off 43% and the S&P 500 is down 49%.

Investors fleeing stocks for safer water isn’t a new theme, but the concept was a big part of the story today. The yield on various Treasury notes hit multi-year lows, and in some cases record lows. Benchmark 10-year notes actually saw yields down more than 6% late in the day, an astounding move as investors appeared to give up on anything asset class with risk and poured cash into Treasuries.

The on-again, off-again bailout package for automakers looked like a go at midday, sparking a big recovery rally for shares of GM and Ford, but the rescue package apparently still has to clear some hurdles, which sparked a slide in automaker stocks from their midday peak late in the day. Shares in Ford Motor Co. (NYSE:F) were flat late in the day, while General Motors Corp. (NYSE:GM) was up 6%.

The tone for a rugged day was cast ahead of the opening when the latest data on weekly unemployment claims showed that 542,000 Americans filed for unemployment insurance last week – the largest one-week total in 16 years. What’s more, the number of people unable to find a job and remaining on continuing claims rose to 4.012 million, the highest number in 26 years. There are a lot of people out of work who can’t find a job, and there are a bunch of new people joining their ranks every week. In that type of environment, an economy that is already struggling will continue to sputter – the only question is how much of the negative economic news is already priced into this historic stock market collapse. The market will get a break from any major economic reports Friday, allowing other factors to compete for investor attention.

The energy market was also a big bearish factor for stocks today. Crude oil prices tumbled some 8% to three-year lows as fears of sinking global demand continues to hammer energy prices. The Energy Select Sector SPDR Fund tumbled some 10% today as energy names were a big drag on index products big and small.

Individual small caps taking a noteworthy dive today included several energy firms with Helix Energy Solutions Group Inc. (NYSE:HLX) sinking 44% as the offshore development company said that production in the wake of Gulf hurricanes was near 50% of pre-storm levels. Sandridge Energy Inc. (NYSE:SD) tumbled 42% as the natural gas company set record lows for their stock.

This week’s collapse has ripped through some long-term support points and totally smashed through our recession bear market target. When the market is in freefall mode like this, things often overshoot the move, but it is dangerous to stand in front of runaway train – it’s better to wait for a sign of a reversal or foundation forming. The next big area of long-term support for the Russell is down around the 365 zone – which is a scary thought, but which is certainly attainable in this environment.