Small caps sink as economy woes back in spotlight

Kevin Pendley | Oct 02, 2008 10:06am EDT | Comment

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Small-cap stocks took a dive on the opening, pulled down by fears about the economy, which overshadowed the Senate’s approval of the financial rescue plan last night. At 9:58 a.m. ET, the Russell 2000 (NYSE:IWM) was down 10.67, or 1.59%, at 660.92.

Concerns about the economy were stoked Wednesday when manufacturing data slipped into recession-like levels on the ISM Manufacturing Survey and as the bottom completely fell out on vehicle sales. Then, when weekly unemployment claims soared this morning, it only added to the gloom.

The weekly claims headline figure came in at 497,000, which was way above the consensus projection of 468,000. Claims were at the highest point since September 2001 and the four-week moving average was at the highest since October 2001. The continuing claims figure was also at five-year highs, setting the stage for a potential bearish surprise on the big monthly jobs report Friday morning.

The Senate approval vote was 74 to 25 and the House is widely expected to approve the rescue plan Friday, after shocking the world last week by giving the Wall Street bailout a thumbs down. This time around, a lame duck President with one of the worst approval ratings in history sent a message to the House that this rescue plan isn’t just a free ticket for investment bankers, saying it was “essential to the financial security of every American.” The newest Senate-tweaked version of Treasury Secretary Henry Paulson’s $700 billion bailout includes tax cut provisions and extended FDIC protection of bank deposits, which should be enough of a sweetener to get House Republicans to provide a nod of approval after the previous plan was narrowly defeated 228 to 205. A simple majority is required for the bill to pass the House, then move on the President for signing.

Around the world, stock markets were mixed despite the Senate’s approval, with Europe shares on the rise, while Asian equities were mixed. Swiss banking giant UBS says they will post a small profit for the quarter, which sparked a rally in European bank stocks. UBS shares jumped some 8% on the news, which is a welcome relief to a firm that endured $42 billion in bad debt write downs and sliced away some 7,000 jobs amid the credit crisis. However, those overnight gains were dramatically trimmed after the awful unemployment claims report.

Flying under the radar a little bit this morning was a slide in crude oil prices. However, the decline in crude is tied more to worries about demand from a slumping economic environment than by supply issues. Shortly after the open, crude oil futures were off about $2 a barrel, and commodities in general were taking a hit as the U.S. dollar soared against the euro.

The greenback rose to one-year highs versus the euro following comments by European Central Bank President Jean-Claude Trichet, as he cautioned that economic risks were to the downside for the eurozone. His comments came after the ECB decided to keep interest rates steady. The whole issue of rate cuts is starting to be in the news again, with The Wall Street Journal reporting this morning that the Federal Reserve is “considering” rate cuts once again. Fed fund futures have already moved to a mild bias for a rate cut this autumn.

Broad market sectors on the decline this morning were paced by fertilizer firms, industrial conglomerates, metal and mining shares, railroads, coal, oil and gas drillers and agriculture products. On the upside, thrifts and airlines were the best performers, followed closely by diversified banks and power products.

Individual small caps of note included Titan Machinery Inc. (Nasdaq:TITN), which tumbled 13% to the lowest point in more than six months. Standard Microsystems Corp. (Nasdaq:SMSC) gapped lower and shed some 12% after sloppy earnings news. Silicon Graphics Inc. (Nasdaq:SGIC) slipped nearly 15% and has had a volatile trading spree in recent days.

Look for chart support today for the Russell 2000 approaching 660, which is a critical level for small-caps. The market has repeatedly rallied off that zone going back more than a year, but a decisive breach of 660 would open the door to test the summer lows, and perhaps clear the way for another leg down in the bear market (yes, we are once again below the 20% trough off record highs that defines a bear market). From a day trading standpoint, support below 660 is at 654 and 650. On the upside today, resistance is pegged at 671, 679 and 680.