Bad news washes into small caps before open

Kevin Pendley | Aug 07, 2008 8:50am EDT | Comment

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The Russell 2000 (NYSE:IWM) is expected to open lower, pulled down by disappointing same-store sales from Wal-Mart Stores Inc. (NYSE:WMT), huge quarterly losses by insurance giant American Insurance Group (NYSE:AIG), troubling weekly unemployment claims and a jump in crude oil prices overnight. The Russell 2000 was down about 0.5% in after-hours trading, suggesting an open today near 721.50.

The weekly claims report came in at 455,000, which was well above the forecast for a decline to 420,000. The 4-week moving average for claims shot to 419,500 and continued claims are at 3.311 million. The recent surge in claims provides a troubling picture of the labor market, and undercuts hopes for economic recovery.

There was an expectation ahead of the July same-store sales reports that discounters like Wal-Mart and Costco (Nasdaq:COST) would outperform more expensive fare from the big department stores as we approach the “back-to-school” sales push. However, if WMT struggles, it sets a nervous tone for the entire group. It should be noted that COST did beat the forecast for sales, which takes a little of the edge off WMT’s disappointment.

AIG reported yet another massive quarterly loss after the close Wednesday, which reignited the credit crunch issue, especially as the theme was repeated with European insurers overnight. AIG shares tumbled more than 8% in overnight trading after the company revealed another $5 billion in losses fueled by write-downs tied to bad mortgage loans.

Crude oil prices jumped more than $2 dollars a barrel in overnight trading and the price was fast approaching $121 dollars, boosted by supply concerns. A fire in a key pipeline in Turkey and disruptions out of Africa sparked the bounce in crude oil, which tumbled to 3-month lows Wednesday.

The combination of weak company news, sobering employment data and rising crude oil halted the recent upside push in the U.S. dollar, with the greenback slipping about 0.6% vs. both the euro and yen ahead of the stock market open.

From a charting standpoint, an abrupt pullback in the Russell 2000 this morning could leave a double top pattern with the previous July peak near 726. The market appeared on the verge of an upside breakout through the consolidation range Wednesday, but still has to generate sustained action above 726 to validate that breakout projection. Look for support today near 720 and then at 714.50. Any push back above 726 will find very little noteworthy chart resistance until we get closer to 734.