Small caps slip as soft data unravels overnight gains

Kevin Pendley | Jun 17, 2008 10:12am EDT | Comment

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Small-cap stocks opened higher, but soon turned red, unable to sustain a run that was triggered overnight on yet another news report that the Federal Reserve was not likely to raise interest rates anytime soon. At 9:55 a.m. ET, the Russell 2000 (NYSE:IWM) was down 1.92, or 0.26%, at 738.82.

The early buying enthusiasm was stoked by relatively positive earnings numbers from financial and consumer “staple” companies, which basically allowed the market to shrug off sloppy economic data.

Ahead of the opening, Best Buy (NYSE:BBY) reported decent earnings — at least compared to market expectations — as did Goldman Sachs (NYSE:GS). Best Buy tried to push higher on the opening, but turned lower within 25 minutes, no doubt disappointing bulls who were hoping that BBY gains would ripple throughout the retail sector. The same “rising tide lifts all ships” theory was in play in the financial sector early as Goldman Sachs shares were up 1.2%, soothing ongoing fears about the credit crunch.

The overnight rally barely felt a ripple initially from the Producer Price Index report, which came in above the forecast at 1.4%. The “core” rate, which excludes food and energy prices, was on target with a gain of 0.2%. Given soaring gasoline and corn prices, excluding food and energy when looking at inflation data seems silly, meaning that the headline PPI was not good news. What’s more, the year-over-year PPI number was at 7.2%, which marked the eighth consecutive month in which that number was above 6%, which hasn’t happened since 1977-1982.

Also on the data front, housing starts came in slightly below expectations at 975,000 units, which marked the worst showing since 1991. And finally, the industrial production report was down 0.2%, well below the median forecast for a rise of 0.1%. At first blush, it looked like investors were going to try to ignore the negative economic data this morning, but when small caps turned south, it suggested that the data wasn’t completely shuffled into the background.

Crude oil prices edged lower overnight and remained soft into the stock market open, slipping back toward $133 dollars a barrel, which allowed investors to focus on earnings and to gain confidence that rate hikes were not in the immediate future.

Broad market sectors grinding higher this morning included finance, refining and marketing, office electronics and internet retail stocks. On the downside, homebuilders, railroads and casinos were attracting sellers.

Meanwhile, small caps of note were highlighted by Infinera Corp. (Nasdaq:INFN), which tumbled nearly 30% after lowering 2008 guidance. PDI Inc. (Nasdaq:PDII) was down almost 10%, reversing a rally from yesterday in quick order. Harris & Harris Group Inc. (Nasdaq:TINY) was down about 9% on news that the firm will sell 2.5 million shares of common stock at $6.15 a share. On the upside, Elizabeth Arden Inc. (Nasdaq:RDEN) rallied about 7%, gapping higher to the highest point since late April.

Looking at the chart picture for today, support for the Russell 2000 comes in at 735, then at 731 and 726. If the market starts to rally again, resistance is at 745.50 and the BIG number is still up at 750.