Small caps sink as credit crunch worries overcome data

Kevin Pendley | Jun 02, 2008 10:17am EDT | Comment

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Small caps opened lower, and remained in the red even after manufacturing data came out better than expected. The tone for a lower opening was forged overnight as credit crunch worries resurfaced in Europe and spilled over into investor psychology in the United States. At 10:05 a.m. ET, the Russell 2000 (NYSE:IWM) was down 8.02, or 1.07%, at 740.27.

The ISM Manufacturing Survey came out at 49.6, which was up from 48.6 last month, and well above the forecast of 48.5. Stocks trimmed losses just slightly after the number came out, but were unable to muster enough buying to dramatically cut into the opening losses as the sellers continued to dominate action even after the report. Construction spending data also came out this morning and was down 0.4%, slightly better than the forecast for a loss of 0.6%

The ISM data this morning was just the first salvo in a week chock full of big economic reports. As the week progresses, investors will have a chance to decipher data on manufacturing, vehicle sales, productivity and employment.

Bradford & Bingley (LON:BB), the largest mortgage lender to residential rental units, tumbled some 25% overnight and said that the housing market was getting worse, not better. The slide in mortgage lenders spilled over to the banking arena and to other financial shares as well. In the United States early losses were seen in JP Morgan (NYSE:JPM), which was off 0.9%. Also, Wachovia (NYSE:WB) opened down 3.3% on news that the bank’s CEO was terminated.

Large caps in the news to start the week included General Motors Corp. (NYSE:GM), which rallied 4% early after a bullish article in Barron’s.

The U.S. dollar was in a rally mode before the ISM data, and retained gains against the euro and yen after the report. The dollar was up about 0.3% against the euro and up nearly 0.8% versus the yen. In general, a strong dollar of late has been linked to a positive for equities, suggesting an unravel of the long commodities/short dollar trade and a better tone for the struggling U.S. economy.

Speaking of commodities, the firm dollar sparked a retreat in many dollar-denominated physical markets, including crude oil, which slipped in overnight action and remained lower through the U.S. stock market opening.

Broad market sectors under selling pressure on the opening included office REITS, real estate management, apparel retail and consumer finance. On the upside, the top performers were coal, brewers, health-care facilities and automobile manufacturers.

Small caps on the move included Agilysys Inc. (Nasdaq:AGYS), which gapped lower, and lost about 7% on earnings-related news. Acura Pharmaceuticals (Nasdaq:ACUR) slumped nearly 7% without any apparent fresh news to power the move. On the upside, ABIOMED Inc. (Nasdaq:ABMD) jumped some 20% on an FDA clearance for a cardiac device.

It will be interesting to see how the chart structure unfolds this week; will the Russell charge through key overhead resistance at 750, or wilt under selling pressure here amid a flood of key economic reports? Friday’s inside session advance lacked conviction, and today’s early slide suggests that the market may need to find a bullish surprise somewhere in the news this week to tackle 750. From a short-term standpoint, support comes in today at 741 and 735. The market slipped through that first support point shortly after the open, and a breach of the latter could open the door toward 726 support.