Russell closes in the red

Kevin Pendley | Jul 07, 2008 4:30pm EDT | Comment

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Small-cap stocks pushed lower again Monday, unable to sustain a morning bounce fueled by sinking crude oil prices and oversold conditions. A decent recovery bounce in the final hour of trading lifted the market off the lows, but in the end, the Russell 2000 (NYSE:IWM) lost 7.51, or 1.13%, to 658.26, sinking to the lowest daily close since March 17.

Losses were likely magnified by a flight-to-quality away from stocks, with the yield on the benchmark 10-year note tumbling more than 2% at one point during the session to the lowest level since late May and the yield on the long bond was at the lowest point since late April before recovering in line with an afternoon bounce off the lows in stocks.

The inability for stocks to push higher in the face of a steep morning slide in energy prices brought with it a sobering reality: there are more things wrong with the market right now than just high crude oil prices.

Financial shares continue to plumb new lows as the credit crisis remains on the front burner. Overnight, bank stocks in Europe were sold off amid talk of further debt write downs and the need to raise capital to shore up balance sheets. Those worries clearly made it across the pond today as well, with the Financial Select Sector SPDR Fund sinking to six-year lows. The financial “spider” is now off 50% from the May 2007 record peak.

Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) were hammered today, both tumbling more than 14% amid talk that the nation’s largest provider of home mortgages will have to raise more capital to cover hefty losses. Other large-cap financial stocks taking a hit today included Lehman Bros. (NYSE:LEH), off some 7%, Merrill Lynch (NYSE:MER) down nearly 2%, Citigroup (NYSE:C), also off about 2% and Bank of America (NYSE:BAC), down about 3%.

Midday comments from San Francisco Federal Reserve President Janet Yellen that interest rate policy was nearing a “crossroads” would not have infused investors with confidence because it basically acknowledges that the central bank is pinned between sluggish growth issues and rising inflation. It’s an uncomfortable situation for investors that brings up ghosts from the past such as stagflation and double dip recessions.

In a weekend research report, analysts at Goldman Sachs said that activity in financial markets closely resembles a double-dip slowdown in economic activity, and that the fiscal stimulus package helped drive up the market from mid-March to June.

“Of course, markets typically move before the real economy does, and this time is no different. The U.S. economy is still in the midst of its stimulus-induced rebound,” Goldman’s report said. “As a result, real GDP growth is tracking modestly in positive territory for Q2, possibly borrowing from the 2% growth rate we expect for Q3. However, beyond the apparent resilience of non-auto retail spending, it’s clear that the fundamentals of the economy are still weakening. Housing prices continue to decline rapidly, the credit crunch is becoming increasingly evident in lending data, oil is marking new highs, and — last but not least — the labor market is unraveling.”

A morning lift from a stronger dollar also had limited shelf life today as the dollar turned negative against the euro, erasing gains of 0.6%, and lost nearly all of a 0.8% rise against the yen as well. The slide in commodities today wasn’t just limited to crude oil either; gold was down, silver was down, copper was down, cocoa collapsed and corn tumbled down its daily trading limit.

Broad market sectors on the slide today were highlighted by thrifts and mortgage financial firms, homebuilding shares, regional banks, investment banking and brokerage stocks, oil exploration and production and gas utilities. Casinos were the top-performing sector on the day, followed by steel, automobile manufacturers, agriculture products and internet software services stocks.

Small caps on the move were highlighted by Virtusa Corp. (Nasdaq:VRTU), which tumbled 30%, gapping lower on preliminary earnings news. Also, Interactive Intelligence Inc. (Nasdaq:ININ) didn’t look like a smart play to investors after preliminary earnings news disappointed. ININ shares shed 22%, gapping lower on unusually brisk volume. Metabolix Inc. (Nasdaq:MBLX) tumbled to fresh move lows, losing over 13% without any apparent fresh news. On the upside, Internet Gold Golden Lines Ltd. (Nasdaq:IGLD), rallied 16% on news that the firm’s board approved a share buyback program. Marten Transport Ltd. (Nasdaq:MRTN), rose 11% and was rapidly approaching six-month highs set a few weeks ago.

The chart picture for the Russell remains bearish, but the market did bounce off logical support in the 650 zone today. If the market can mount further upside action Tuesday, then it would heighten the potential for a short-term bottom to be in the mix. However, any slide through the March lows would open the door to an extensive leg down, which might be difficult right now given oversold momentum readings.