Small caps attract money even as large caps waffle

Kevin Pendley | Sep 03, 2008 4:32pm EDT | Comment

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Small-cap stocks pushed higher Wednesday, finding comfort in soft energy and firm dollar trends, even as large-cap stocks fretted about global growth worries and a mixed picture on the economic front. The Russell 2000 (NYSE:IWM) closed up 3.40, or 0.46%, at 741.91.

Small caps outperformed large-cap index products and the straight dollar spread of the S&P 500 against the Russell 2000 tumbled to fresh move lows and is at the lowest point in well more than a year. For the day, the S&P 500 was down 0.20% and is now down 13.1% on the year. Meanwhile, the Dow was up 0.14% today and is off 13% for the year. The biggest losses today were suffered in the technology arena, with the tech-laden Nasdaq 100 sinking 0.9%.

The terrain right now seems particularly difficult for investors to navigate. Just because crude oil prices sink, it doesn’t necessarily mean the overall stock market will rally. And just because the dollar is strong, it doesn’t necessarily mean money is shifting into U.S. assets. There are growing concerns that the slide in energy prices is more a reflection of a slowing global economic environment, which could pinch overseas demand for U.S. goods — and U.S. exports were about the only bright spot in the recent economic slowdown. Along those same lines, American technology companies are cautioning that global customers may cut back on spending, which has been a chilly issue tech stocks.

In today’s action, Intel Corp. (Nasdaq:INTC) was the poster child for the tech spending worries, with INTC stock sinking 4.5%. Research in Motion Ltd. (Nasdaq:RIMM), also posted declines greater than 3% and Nokia Corporation (NYSE:NOK) slumped to fresh move lows and are at the lowest point in more than a year amid talk that worldwide cell phone users just aren’t that eager to pay up for the latest and greatest technology gizmos.

The sloppy price action in large caps today also provided some confirmation that Tuesday’s decline in stocks amid a collapse in crude oil prices was not a fluke. Crude oil prices remained on the defensive today, slipping $0.36 a barrel to $109.35, but did manage to bounce about $2 dollars off the intraday low. Outside of energy, commodities in general were soft, with the Commodity Research Bureau Index of 19 physical markets slipping about 0.5%, pulled down by a firm tone in the U.S. dollar. Not too long, declining crude oil prices, tumbling commodity prices and a strong dollar would have been the perfect bullish brew for stock market investors.

Today’s batch of economic news, indicators and Fed speak did little to clear up a murky picture. The morning’s factory orders report came in above the forecast at 1.3%, but the data is for July numbers and seldom catches the fancy of stock traders for more than a few minutes at best. Before the factory data came out, the weekly MBA Mortgage Application Index also provided a glimmer of hope on the housing front, as mortgage applications, purchasing applications and refinance applications all ticked higher. Together, those indicators might have provided a mild bid to the market, but they were a little lost in the headlights of news that a big hedge fund was closing down because of massive losses on commodity-themed equity trades.

That hedge fund, Ospraie Management LLC, was thought to have about $2.8 billion in investments at the beginning of August, but was leaking oil badly as commodity markets have turned south. Clearly, the market can weather a storm of an isolated big hedge fund going under, but it did raise concerns that the global unwinding of the long commodity/short dollar trade could trigger a domino effect among hedge funds that are gushing losses. Trying to determine the macro health of all the hedge fund players isn’t that much less daunting than trying to decipher how big of a toll the credit crisis will eventually take on the banking industry.

Then at midday, Boston Federal Reserve Bank President Eric Rosengren came out and said that the ongoing credit crunch has dulled the supportive impact of interest rate cuts and cautioned that slowing activity in the second half of 2008 could lift the unemployment rate above 6%. Rosengren’s remarks seemed quite a bit more dovish than recent Fed speak, and suggested that the monetary policy leaders will remain on hold for some time.

Finally, this afternoon saw the release of the “beige book” which is a report on business activity in the 12 Federal Reserve regions. According to Steven Wood, chief economist with Insight Economics, the beige book said that economic activity remained weak in late July and early August. “The housing market continued as the main source of weakness, aggravated by the recent turmoil in the credit market. In addition, consumer spending has turned sluggish and commercial construction appears to be softening,” Wood said in an email. “Financial conditions have tightened, loan delinquencies are rising and credit quality has deteriorated slightly. Credit standards have been tightened and loan growth has slowed. Labor markets have also weakened outside of the energy industry. This report suggests that the FOMC will hold policy steady at the conclusion of their meeting in two weeks. Although the downside risks to growth have not changed, the upside risks to inflation have been downgraded because of the recent retreat in energy and some commodity prices.”

Of course, today’s batch of economic “events” were simply the opening act ahead of Friday’s big headline event this week…the monthly employment report. Thursday morning serves up weekly unemployment claims, which always seem to take on greater significance the day before the jobs data comes out. In addition, the ISM Non-manufacturing Survey comes out Thursday morning, and there will be a couple of economic speakers in the afternoon.

Individual small-cap stocks of note today included Noble International Ltd. (Nasdaq:NOBL), which jumped 16% to the highest point since March. Radian Group Inc. (NYSE:RDN) rallied nearly 21%, topping the $5 mark for the first time since early June. Central Garden & Pet Co. (Nasdaq:CENTA) rose 15% and is approaching a big chart gap from mid-June that sent prices reeling during the summer. On the downside, National Coal Corp. (Nasdaq:NCOC) stumbled 13% and was caught in an overall selling mood for coal stocks, which were one of the poorest performing broad market sectors today.