Small caps tumble to two-month lows

Kevin Pendley | Jun 24, 2008 10:24am EDT | Comment

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Small-cap stocks edged lower on the open, pulled down by overseas equities declines and an on-going rout in the financial arena. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 12.36, or 1.72%, at 707.45, sinking to the lowest level since April 24.

Into the U.S. stock market opening, prices for “black gold” were off from the overnight highs quite a bit, which helped trim opening losses for equities. In overnight action, crude oil prices climbed near $139 dollars a barrel amid rumors of an attack on Iran. The rumors were denied by Iranian officials and crude oil prices gradually pulled back off the highs. By the opening, crude oil prices actually slipped into the red a tad and were bouncing back and forth around steady levels.

The consumer confidence report came out at 50.4, which was well below the forecast of 56 and down from a revised 58.1 reading last month. The figure was a fresh 16-year low and equity markets and the U.S. dollar extended losses after the soft data on confidence.

The FOMC started a two-day policy meeting today, and some traders may go into hibernation waiting for the official rate news Wednesday afternoon. Fed funds futures have priced out any chance for a rate hike from this meeting, and the market is expecting interest rate policy to move into a hold mode.

The Case-Shiller U.S. home price index came out at minus 1.4% versus minus 2.2% in March. The year-over-year decline was a whopping minus 15.3%; although the numbers are numbingly bad on face value, they were actually a touch better than feared, sparking hope that housing market declines are nearing some kind of bottom.

Earlier today, the Johnson Redbook Retail Sales Index rose 2.8% for the week and was up 2.4% for the year. However, the figures had no impact on the overnight slide in stocks, and if the economy starts to soften even more, it could put pressure on consumer spending. “With borrowing costs up for the less credit-worthy corporations and with financial institutions tightening their lending terms, borrowing to fund share buybacks is likely to be less feasible. In short, retailers had better not count on strong sales once those tax rebate checks have been spent because household cash flow is diminishing at a rapid rate,” Paul Kasriel, chief economist with the Northern Trust said in a morning research report.

Large-cap shares of note this morning included United Parcel Services (NYSE:UPS). The package courier shares were off about 4% shortly after the opening following a profit warning from the company amid a sluggish economic environment and soaring fuel costs. UPS rival Federal Express (NYSE:FDX) was down 1.4% and both stocks were at 52-week lows. Bucking the overall downdraft, Eastman Kodak (NYSE:EK) was up 13% as the board approved a $1 billion stock buy-back program.

Broad market sectors on the decline early today included air freight couriers, publication and printing shares, fertilizer stocks and department stores. Sectors attracting buyers included photo products, food retail shares and steel stocks.

Small caps of note included comScore (Nasdaq:SCOR), which was down 12% early, gapping lower to correct some of the recent dramatic gains that have been seen since late April. Entegris Inc. (Nasdaq:ENTG) also gapped lower, and shed about 8%, plunging below the 20-day moving average. Stanley Inc. (NYSE:SXE) tumbled some 7% after the opening, apparently attracting a bit of profit-taking after hitting six-month highs Monday. On the upside, AspenBio Pharma Inc. (Nasdaq:APPY), rallied 10% without any fresh news.

Looking at the chart picture in small-cap stocks, the Russell 2000 is at a critical level, testing the recent range lows. Persistent action below 717.50 would suggest that the market has rolled over into a new leg down, and the downside target for a new lower range is at 690. From a short-term perspective, look for resistance today on a bounce at 720.50 and 726. Meanwhile, if the slide deepens, support is at 704, then at the figure of 700.