Russell back below 500 as economy, job fears counter bargain hunting

Kevin Pendley | Oct 23, 2008 10:20am EDT | Comment

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Small-cap stocks flashed some surprising upside muscle on the opening, but the initial support from bargain hunting was quickly countered by selling stirred by worries over the sluggish economy, a troubling jobs outlook and sloppy earnings numbers. The Russell 2000 (NYSE:IWM) was down 5.88, or 1.17%, at 496.08, slipping back below the 500 line, which opens the door to further chart-related selling if that mark now becomes resistance.

The weekly unemployment claims report came in above the forecast at 478,000, topping the projection by 13,000. The Labor Department said that claims were boosted some 12,000 by Hurricane Ike and that the number of continuing claims dipped slightly in the latest week. However, weekly claims, the four-week moving average and continuing claims are all hovering near multi-year highs that are consistent with a recession.

Most analysts are predicting a sharp rise in unemployment levels in coming months, and former Federal Reserve Chairman Alan Greenspan said earlier today that there will be a significant rise in layoffs and unemployment still to come. Greenspan is testifying today before a House oversight committee on the role of regulators. He also said that stabilization in home prices is still far away.

Speaking of the housing issue, RealtyTrac released a report early this morning saying that foreclosures were up 21% from September 2007 and up a whopping 71% from the third quarter of last year. They estimated that 1 in every 475 homes received a foreclosure filing in September.

Amazon.com Inc. (Nasdaq:AMZN) beat the third-quarter profits forecast but predicted holiday sales would miss Street expectations, showing that online retailers are not immune to the slowdown in economic activity. AMZN shares were hammered early, sinking 12% shortly after the open.

Crude oil prices turned up about $1 a barrel awaiting news from the OPEC meeting, where oil ministers are expected to slash production to offset sinking prices and soft demand. Ahead of the meeting this morning, the Saudi Arabian minister said that the market would determine the price of crude oil. The U.S. dollar was on firm footing this morning, which should continue to exert pressure on many commodities markets. However, physical markets have been hammered in recent days and may be oversold from a short-term standpoint.

Individual small caps of note this morning were highlighted by Phoenix Technologies Ltd. (Nasdaq:PTEC), which gapped lower and was down some 27% as the systems software firm released quarterly results that didn’t impress investors. Braskem SA (NYSE:BAK) tumbled 23% on light volume, as the Brazilian petrochemical company joined other Latin American ADRs in the recent tailspin fueled by commodity losses and pension fund woes in South America. On the upside, Vasco Data Security International Inc. (Nasdaq:VDSI) soared 24% in response to solid earnings.

The Russell continues to hang tough around the key 500 line, but is flirting with a breach of trendline support off the previous lows. If the market slips back through 500 with conviction today, it could spark a fairly rapid downdraft, with the first support line down near 485. On the upside, if this morning’s firm open can be built upon, resistance is at 514, then at 525.