Late slide erases intraday recovery bounce; clouds rate cut glow

Kevin Pendley | Oct 08, 2008 4:31pm EDT | Comment

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In a fitting finish to an exasperating day, small-cap stocks collapsed in the final half-hour of trading as worries about a recession and tight credit lines clouded exuberance tied to a dramatic coordinated global rate cut ahead of this morning’s stock market open. The Russell 2000 (NYSE:IWM) closed down 12.39, or 2.22%, at 546.57, the lowest daily close since August 2004.

It was a turbulent session that saw the market sharply higher ahead of the open, sharply lower shortly after the open, solidly higher in mid-morning, sharply lower at midday, solidly higher with an hour to go, but then finally sinking back into a red sea by the close. For the year, the Russell is now down 28.6%, while the Dow is off 30.2% and the S&P 500 is down 32.9%. At the lows today, the Russell was down 37.1% from the all-time highs.

At approximately 7:00 a.m. ET this morning, the Federal Reserve slashed the target rate for fed funds to 1.5% from 2.0%, which marked the lowest level for fed funds since August 2004. At the same time, central bankers in England, Switzerland, Sweden and China also announced rate cuts, resulting in the first concerted international action on weak economic conditions since the 9/11 attacks seven years ago.

The market appeared to struggle mightily early today with whether or not the surprise global rate cut move was really enough to unclog credit lines and jolt the economy out of the grip of recession. For most of the day, the answer to those questions appeared to be “no.” However, tech stocks led the way back out of the midday slump, apparently driven by bargain hunting and by ideas that access to cheaper money would help investment in technology companies. The tech-laden Nasdaq 100 gave back a 4% afternoon rally by the close, but still managed to finish flat on the day, bouncing off five-year lows in the process. At the trough today, the Nasdaq 100 was down 42% from record highs, near levels consistent with previous recession collapses in the stock market.

Retailer shares also pulled higher this afternoon, but slipped into the red at the close, hurt by sloppy same-store sales from a whole host of companies, including bellwether discounters Wal-Mart Stores Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT), which shook off steep morning declines to close down 0.4% and up 3.2%, respectively. Department store sales however, were truly awful and that group weighed on stocks, with names such as JC Penney Company Inc. (NYSE:JCP), Saks Inc. (NYSE:SKS), Nordstrom Inc. (NYSE:JWN) and Dillards Inc. (NYSE:DDS) all missing the sales forecast. JCP, SKS and JWN were all lower on the day, but DDS managed a mild positive finish.

The stock market kicked off the third-quarter earnings season with a thud today as ALCOA Inc. (NYSE:AA) announced it was halting major capital projects following disappointing quarterly profits. AA shares lost 12% for the day. The market was already wary of the profit season results earlier this week after Bank of America Corp. (NYSE:BAC) announced plans to raise $10 billion in capital and also slashed dividends. BAC shares slipped down to $20.01 at the lows today, but closed near $22, down about 7%. Other financial shares did moderately better, however, with the Financial Select Sector SPDR Fund down just 2.7% after hitting more than 10-year lows earlier in the day.

On the economic data front, there was some good news this morning as the National Association of Realtors pending home sales data rose 7.4% to the highest level since June 2007. At the time of release, stocks climbed to the morning highs, but sank dramatically into midday, which suggested that while the data surprise was nice to see, it certainly wasn’t a tell-tale sign that the housing woes were over. In addition, the MBA Mortgage Application Survey rose 2.2%, but was still down 28.6% from last year and hovering near seven-year lows. These two reports tend to fly under the radar screen most of the time, but Thursday’s weekly claims release at 7:30 a.m. ET should get plenty of attention, especially after unemployment claims last week were the highest since September 2001.

Individual small caps on the rise today included Credit Acceptance Corp. (Nasdaq:CACC), which jumped some 16%. PeopleSupport Inc. (Nasdaq:PSPT) rallied about 22%, recapturing a huge chunk of Tuesday’s big collapse. Lawson Products Inc. (Nasdaq:LAWS) was up nearly 20%, reversing from Tuesday’s slide, which marked the lowest daily close in months. DRDGOLD Ltd. (Nasdaq:DROOY) rallied some 23% and Royal Gold Inc. (Nasdaq:RGLD) jumped 16% to 52-week highs as gold stocks were in favor today amid the nerve-wracking volatility in other assets. Among large-cap listings, gold shares dominated the biggest percentage movers on the day and it will be interesting to see if they retain upward momentum if the stock market stabilizes. For now, the yellow metal is seen as a safe-haven in a very volatile, asset-averse world.

Technically speaking, today’s action seemed so full of promise with just 30 minutes or so left to trade. However, the sudden freefall into the close swept most of the bullish signals back off the plate. It is worth noting that the CBOE’s Volatility Index (VIX) notched a record intraday high, and lofty VIX readings have often accompanied major stock market turning points in the past. It’s also interesting to see that the low today was only 10 handles off a 61.8% Fibonacci retracement of the entire bull market run that took place from 2002-2007. The area from 550 down to 515 marks logical long-term support for the Russell and is a reasonable zone to look for a “breather” from the stunning power of the recent decline. All this said, it will take a dynamic reversal formation on weekly charts to hint that a more convincing low for this bear market run is in play.