Small caps sink, unable to sustain opening bounce
Small-cap stocks opened higher but quickly slipped into negative territory, as a bounce in banking and commodity stocks and a rise in overseas equities was countered by weak profit reports for a raft of small-cap firms. The market is clearly oversold following dramatic losses this week, which could power a pre-weekend short-covering bounce, but fear about the slumping global economy remains a big part of negative investor psychology. At 10:00 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.29, or 1.11%, at 381.02, sinking to yet another new bear market low.
On the banking front, shares in Citigroup Inc. (NYSE:C) have absolutely collapsed in recent days and the firm’s management is reportedly meeting today to discuss strategy to shore up confidence in the massive banking firm. The bank’s CEO said today that they are not looking to spin off Smith Barney and that “rumor mongering” was to blame for some of the recent decline in stock value. C stock was up 11% shortly after the open and financial shares in general were on the rise, with the Financial Select Sector SPDR up 3.5%.
On the retail front, Wal-Mart Stores Inc. (NYSE:WMT) CEO announced he was stepping down. WMT has been one of the few bright spots in a dreary year for equities, and investors took today’s news in stride. WMT shares were up 1.6% and the S&P Retail Index was up 1.2%.
A big part of the action this week has been massive flight to safe haven ports and out of stocks, which drove yields on Treasury products to historically low levels. This morning, the bounce in equities has created a big bounce for Treasury yields, with the 10-year note yield up 5.8%.
On the commodity front, crude oil prices rebounded about $0.75 a barrel into the stock market open, providing a supportive tone for energy stocks. The U.S. dollar was down about 1% against the euro, which was also seen as a mild bullish element for commodities in general.
Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) said Thursday afternoon that they would suspend foreclosures of occupied homes until early 2009. Perhaps this will only delay the inevitable eviction of people out of homes they can no longer afford, but it seems like a nice gesture into the Christmas holiday season and just maybe some of those families will find a way to house payments back on track. Similar measures to slow evictions have been announced in recent weeks by other big mortgage holders, including JP Morgan Chase and Co. (NYSE:JPM), who bought the massive mortgage portfolio from Washington Mutual.
Despite the improved market tone this morning, it should be noted that any improvement today still comes against a backdrop of one of the worst stock market declines in history. Perhaps this will trigger a tradable bear market bounce and perhaps we’re near values that support foundation building for a major low, but it appears the worst of the economic news is still on the horizon. To that end, researchers at Goldman Sachs today said that the upcoming November employment report will be the worst yet for 2008. “Our preliminary forecast is for a payroll decline of 350,000 and an increase in the unemployment rate to 6.8%. The rapid deterioration in the labor market will ratchet up the pressure on government policymakers – particularly the incoming Obama administration – to engage in aggressive fiscal stimulus and other measures to stabilize the economy.” Goldman analysts also are now predicting that fourth-quarter GDP could contract by a stunning 5% this quarter and that unemployment could reach a staggering rate of 9% next year.
Federal Reserve Richmond President Jeffery Lacker said this morning that the economy could reverse the downward bias in 2009, which would trigger inflation risks. Lacker is known as an inflation “hawk” and he said that monetary policy right now is “quite stimulative” even though he warned that fourth-quarter contraction could be “significant.”
Individual small caps on the rise this morning were highlighted by Alpha Natural Resources Inc. (NYSE:ANR), which was up 15%, as the coal miner was trying to recoup extreme losses from Thursday and coming off news a few days ago that pellet maker Cliffs Natural Resources Inc. (NYSE:CLF) dropped plans to acquire ANR. Life Time Fitness Inc. (NYSE:LTM) rose 24% on a bounce from 52-week lows forged Thursday. There wasn’t any fresh news behind the rally this morning, but this is the season for New Year’s fitness resolutions. LTM stock hit a recent peak above $40 a share in mid-September; this morning it is trading just above $11. On the downside, this morning, Foot Locker Inc. (NYSE:FL), collapsed 42% as the athletic shoe retailer missed earnings projections. Celanese Corp. (NYSE:CE) fell 26% after the chemical firm said 2008 results will miss the forecast (which was already revised downward).
Given the early upside push in small caps this morning, it will be interesting to see if the rally will have legs. Resistance points to watch today come in at 396.50, then at 403.50 and 413.00. If the market starts to falter, then some support could come into view around the 375.00 area. Take note that options expirations play out today, which could add a little extra volatility into the morning and closing activity.
On the banking front, shares in Citigroup Inc. (NYSE:C) have absolutely collapsed in recent days and the firm’s management is reportedly meeting today to discuss strategy to shore up confidence in the massive banking firm. The bank’s CEO said today that they are not looking to spin off Smith Barney and that “rumor mongering” was to blame for some of the recent decline in stock value. C stock was up 11% shortly after the open and financial shares in general were on the rise, with the Financial Select Sector SPDR up 3.5%.
On the retail front, Wal-Mart Stores Inc. (NYSE:WMT) CEO announced he was stepping down. WMT has been one of the few bright spots in a dreary year for equities, and investors took today’s news in stride. WMT shares were up 1.6% and the S&P Retail Index was up 1.2%.
A big part of the action this week has been massive flight to safe haven ports and out of stocks, which drove yields on Treasury products to historically low levels. This morning, the bounce in equities has created a big bounce for Treasury yields, with the 10-year note yield up 5.8%.
On the commodity front, crude oil prices rebounded about $0.75 a barrel into the stock market open, providing a supportive tone for energy stocks. The U.S. dollar was down about 1% against the euro, which was also seen as a mild bullish element for commodities in general.
Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) said Thursday afternoon that they would suspend foreclosures of occupied homes until early 2009. Perhaps this will only delay the inevitable eviction of people out of homes they can no longer afford, but it seems like a nice gesture into the Christmas holiday season and just maybe some of those families will find a way to house payments back on track. Similar measures to slow evictions have been announced in recent weeks by other big mortgage holders, including JP Morgan Chase and Co. (NYSE:JPM), who bought the massive mortgage portfolio from Washington Mutual.
Despite the improved market tone this morning, it should be noted that any improvement today still comes against a backdrop of one of the worst stock market declines in history. Perhaps this will trigger a tradable bear market bounce and perhaps we’re near values that support foundation building for a major low, but it appears the worst of the economic news is still on the horizon. To that end, researchers at Goldman Sachs today said that the upcoming November employment report will be the worst yet for 2008. “Our preliminary forecast is for a payroll decline of 350,000 and an increase in the unemployment rate to 6.8%. The rapid deterioration in the labor market will ratchet up the pressure on government policymakers – particularly the incoming Obama administration – to engage in aggressive fiscal stimulus and other measures to stabilize the economy.” Goldman analysts also are now predicting that fourth-quarter GDP could contract by a stunning 5% this quarter and that unemployment could reach a staggering rate of 9% next year.
Federal Reserve Richmond President Jeffery Lacker said this morning that the economy could reverse the downward bias in 2009, which would trigger inflation risks. Lacker is known as an inflation “hawk” and he said that monetary policy right now is “quite stimulative” even though he warned that fourth-quarter contraction could be “significant.”
Individual small caps on the rise this morning were highlighted by Alpha Natural Resources Inc. (NYSE:ANR), which was up 15%, as the coal miner was trying to recoup extreme losses from Thursday and coming off news a few days ago that pellet maker Cliffs Natural Resources Inc. (NYSE:CLF) dropped plans to acquire ANR. Life Time Fitness Inc. (NYSE:LTM) rose 24% on a bounce from 52-week lows forged Thursday. There wasn’t any fresh news behind the rally this morning, but this is the season for New Year’s fitness resolutions. LTM stock hit a recent peak above $40 a share in mid-September; this morning it is trading just above $11. On the downside, this morning, Foot Locker Inc. (NYSE:FL), collapsed 42% as the athletic shoe retailer missed earnings projections. Celanese Corp. (NYSE:CE) fell 26% after the chemical firm said 2008 results will miss the forecast (which was already revised downward).
Given the early upside push in small caps this morning, it will be interesting to see if the rally will have legs. Resistance points to watch today come in at 396.50, then at 403.50 and 413.00. If the market starts to falter, then some support could come into view around the 375.00 area. Take note that options expirations play out today, which could add a little extra volatility into the morning and closing activity.
About the Author
Kevin Pendley covers the Russell 2000 index for SmallCapInvestor.com and writes a weekly technical analysis column.
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