Another collapse as earnings disappoint, commodities tank

Kevin Pendley | Oct 22, 2008 4:33pm EDT | Comment

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Small-cap stocks cascaded lower Wednesday as a spree of soft earnings reports and a dreary outlook as the economy veers into recession took a toll on the market. The Russell 2000 (NYSE:IWM) closed down 28.85, or 5.43% at 501.97. This was the second-lowest close in five years, and both of those closes have taken place within the last three weeks. This also marked the fifth-largest one-day decline of the year. The Russell is now down 33.4% for 2008, while the Dow is off 36.36% and the S&P 500 is down 38%. Although the Russell and Dow averted sinking to fresh closing lows for the bear market collapse, the S&P 500 and Nasdaq 100 did set new closing lows.

Although there were isolated upside earnings surprises as the market digests a flood of key reports this week, the overriding investor sentiment right now is that the results are relatively soft and were already watered down to begin with (from an expectation standpoint). What’s more, concerns that consumer spending and a global growth stall will pinch corporate profits even more in the months to come clearly had a negative impact on stocks. Even the companies with solid profits were wary of the operating environment heading into 2009. Even McDonald’s Corp. (NYSE:MCD) — which by most accounts posted impressive results — was unable to post a positive close for the day.

Another theme that remained at play was the wipeout in commodity valuation and the impact that had on stocks with commodity themes. Commodity firms dominated the list of worst performing sectors today, paced by metal and mining shares, coal stocks, oil and gas drillers, aluminum and gold. Other sectors taking a body blow today included motorcycle manufacturers, restaurants, tobacco companies and internet retail stocks. On a depressing side note, there wasn’t even one broad S&P sector group in the plus column late this afternoon.

The slide in commodities was reflected by a huge decline in the Commodity Research Bureau Index, which tumbled 4.5% to the lowest point since August 2004. The headline news on the commodity front was clearly crude oil, which collapsed 7.5%, or more than $5 a barrel and is now back below $67 — down some 54% from the summer peak as the market braces for a sharp pullback in demand due to economic concerns.

Individual small caps on the decline today were highlighted by Nortel Inversora SA (NYSE:NTL) and Telecom Argentina SA (NYSE:TEO) as South American ADRs continue to be ravaged by the slide in commodities. In the case of NTL and TEO, the picture is even more bleak because the Argentinean government looks to be forced to take over operation of some $30 billion in pension funds (NTL holds stock of TEO). Also on the slide, Kindred Healthcare Inc. (NYSE:KND) tumbled some 33% as the company updated guidance and the numbers didn’t sit well with investors. Titan Machinery Inc. (Nasdaq:TITN) slumped 21%, making new lows for the move along with the rest of the market. On days like today, it’s often interesting to find which stocks bucked the overall downdraft. Two of the biggest upside percentage movers were Vascular Solutions Inc. (Nasdaq:VASC) and Enhanced Income Security (NYSE:BGH), which were up 15% and 7%, respectively.

Looking at the chart picture, the market closed below trendline support from the recent lows, which seriously damages the bottoming argument. A case can be made that the market is already snapping a little pennant formation; if so, it would project a downside target of at least 400, well clear of the previous low at 468. Certainly, the breach today of key “figure” support at 500 does not auger well for the market.

Looking ahead to Thursday’s action, the market remains in the throes of heavy earnings season, but we’ll also get a glimpse of weekly unemployment claims ahead of the opening, which could toss some volatility into the mix.