Retail sales at three-year low, spark opening slide in small caps

Kevin Pendley | Oct 15, 2008 10:32am EDT | Comment

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Small-cap stocks took a dive on the opening, tugged down by worries about the economy, dreadful retail sales results and ongoing concerns about clogged credit markets. At 9:53 a.m. ET, the Russell 2000 (NYSE:IWM) was down 16.49, or 2.93% at 538.39.

The stock market was already limping toward a lower opening, but the 8:30 a.m. ET release of retail sales sparked an extension of pre-market losses on futures and put a decidedly sour tone on the morning’s action. September retail sales came in at minus 1.2%, which was well below the forecast for a slide of 0.6%. This marked the largest one-month decline since August 2005, and more importantly, retail sales fell for three consecutive months, something which has not happened in more than 17 years. With two-thirds of the U.S. economy driven by spending, the slide in retail sales is an ominous sign that consumers are strapped for cash, especially with the unemployment rate on the rise.

At the same time that retail sales data came out, the market also got numbers on wholesale inflation via the PPI report. The headline figure for PPI met the forecast at minus 0.4% and clearly was upstaged by the sobering retail sales data. If you’re into obscure overseas data, the Baltic Exchange’s dry sea freight index tumbled to a 5 ½-year low overnight spurred by worries about a global recession and a deep pullback in demand for raw materials from China.

Back on the home front, factory activity in New York slumped in October, with the NY Manufacturing Survey down 24.6% to the lowest reading in some seven years, adding to the bleak tone from the retail sales figure. Earlier this morning ahead of the opening, the MBA Mortgage Application Survey rose 5.1% as mortgage rates dipped, but the purchase activity was still hovering near seven-year lows. With the consumer pinched right now by employment worries and fretting about the collapse in the stock market, it’s unlikely that the housing market is ready to explode out of the mud anytime soon.

The sudden batch of economic data overshadowed corporate results this morning, but this is key earnings season and those figures will clearly play a roll on how individual equities trade. Among “name” large-caps this morning we see better-than-expected figures for tech bellwether Intel Corp. (Nasdaq:INTC), soft drinks giant The Coca Cola Co. (NYSE:KO) and Wells Fargo & Co. (NYSE:WFC), but sloppy results were seen from Delta Air Lines Inc. (NYSE:DAL), JP Morgan Chase & Co. (NYSE:JPM) and St. Jude Medical Inc. (NYSE:STJ).

As for the credit crunch, investors are still concerned that Libor rates have not thawed more quickly. Although Libor levels did come down overnight, bank lending is still very cautious, reflected in the wide spread to Fed funds. There is a line of thought that until Libor rates return to more normal levels, the market won’t be able to move away from the credit crisis on to the next key obstacle.

Crude oil prices tumbled more than $3 a barrel, sinking below $76 dollars to 13-month lows, which could be a drag on energy stocks. Energy markets now fear a global recession, which would crush demand; thus, energy prices are often trading in lock-step with equities in recent days.

Commodity themes dominated broad market sectors on the slide early today, with metal and mining stocks, coal, oil and gas drillers, steel, oil exploration and aluminum all taking a hit. Other sectors on the decline included construction and farm machinery and consumer finance. Sectors bucking the early decline were few and far between, but soft drink makers, airlines and biotechs attracted some buyers.

Individual small caps on the move early today included Avatar Holdings Inc. (Nasdaq:AVTR), which was down 6% after sinking to fresh move lows shortly after the opening. Jones Apparel Group Inc. (NYSE:JNY) tumbled some 24% after reporting quarterly results and revising the outlook. Callaway Golf Co. (NYSE:ELY) was down 15% as the company released preliminary earnings, sparking a big downside gap on the open.

Looking at the chart picture for small caps, the market appears to be consolidating after a breathtaking bounce off the lows. The opening downside gap this morning was not big enough to form an “island” top on intraday studies, but the inability to sustain buying momentum after the huge September to October collapse is cause for concern. From a short-term perspective today, initial support is close by at 538, then the next level is down near 524. If the market can right the ship as the day progresses, look for resistance around 557, then at 570.