Russell 2000 slides on store sales, econ data, credit crunch fears

Kevin Pendley | Aug 07, 2008 10:10am EDT | Comment

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Small-cap stocks opened lower, succumbing to a series of bad news events overnight, including massive quarterly losses at insurance firm American Insurance Group (NYSE:AIG), disappointing sales at discount giant Wal-Mart Stores Inc. (NYSE:WMT), a bounce in crude oil prices and sobering economic data on the jobs front. At 10:03 a.m. ET, the Russell 2000 (NYSE:IWM) was down 6.09, or 0.84% at 719.80.

The market was already on the defensive ahead of the weekly claims report this morning and when unemployment filings topped the forecast, it generated another leg down in futures ahead of the regular opening. Weekly claims were pegged at 455,000, which marked the largest weekly figure since March 2002. What’s more, the number was well above the forecast of 420,000 and simply adds another layer to ongoing concerns about the labor market. The continuing claims number rose to a fresh cycle high at 3.311 million. The Labor Department said that claims were goosed by a program to extend benefits, but it’s not exactly like the people who need an extension have found a job yet.

“Continuing claims, which are inversely related to job creation, jumped this week to their highest level since December 2003,” Steven Wood, chief economist with Insight Economics, said in an email. “This is an indication that hiring has weakened,” he said.

The pending home sales report, which came out at 10:00 a.m. ET, was up 5.3% and appeared to have limited impact on the market. Even with a gain during June, the number was still down 12% from last year.

The mood for a bearish morning was initially cast Wednesday after the close when AIG’s earnings reflected a huge loss that reignited concerns about the credit market crunch. That mood only darkened when Wal-Mart’s same-store sales disappointed and suggested that the well from stimulus was drying up. Even though rival discounter Costco Wholesale Corp. (NYSE:COST) beat the sales forecast, the numbers were bolstered by inflated gasoline prices and therefore not quite as robust as they appear on the surface. Of course, if the labor market continues to soften, retailer sales across about any area will likely struggle. Shortly after the open, AIG shares were off 14%, WMT was down 3.7% and COST was down 0.6%.

In recent days, the stock market has been the beneficiary of a dramatic downturn in crude oil prices, but energy prices were back on the rise this morning. Crude oil prices were up about $2 dollars a barrel near the $121 zone on supply concerns spurred by a fire in a key Turkey pipeline and by disruptions out of Nigeria.

The euro/dollar FX pair has been on a little bit of a roller coaster ride this morning, with the dollar tumbling 0.6% in the wake of the weekly claims report, then suddenly bouncing back near steady levels on a stream of comments by ECB President Jean-Claude Trichet, who said economic growth could be “substantially weaker” looking forward in the eurozone and that “downside risks prevail.” Despite the comeback move against the euro, the greenback remained under pressure against the yen, pulling back from 7-month highs registered Wednesday.

Broad market sectors on the decline this morning included insurance, airlines, hotels, general merchandise stores, thrifts and mortgage finance firms, hypermarkets and distillers. On the upside, gaining sectors were few and far between, with only real estate management and gold showing much strength.

Individual small-caps on the move were highlighted by Micrus Endovascular Corp. (Nasdaq:MEND), which tumbled 21%, gapping lower on disappointing quarterly results. American Reprographics Co. (NYSE:ARP), tumbled 16%, sinking to fresh 52-week lows. ARP is now off some 50% from the highs last summer. Citi Trends Inc. (Nasdaq:CTRN) was down 23% as investors weren’t impressed with store sales numbers. On the upside, Haynes International (Nasdaq:HAYN) was up 17%, boosted by earnings news.

It will be interesting to see how the Russell trades throughout the day, to see if a recovery move can be hammered out amid all the gloomy news this morning. If not, there is a risk that a double top will be left on the charts near 726, which also represented the July peak. In addition, this morning’s pullback failed to provide validation for the range breakout move Wednesday. Look for support today at 714.50, then down at 707.50. Meanwhile, resistance is at the aforementioned 726, then up at 734.