Small caps notch five-year closing low; financials slump

Kevin Pendley | Oct 23, 2008 4:40pm EDT | Comment

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Small-cap stocks remained in a tailspin Thursday, pulled down by sloppy earnings, recession fears, persistent talk of rampant redemptions and sinking financial shares. The Russell 2000 (NYSE:IWM) closed down 12.05, or 2.40%, at 489.92, which marked the lowest daily close since September 2003. Small-cap stocks were especially punished today relative to the broad market and for the first time in months the Dow officially replaced the Russell 2000 as a better performing index for 2008. The Russell is down 36% for the year, while the Dow is off 34% and the S&P 500 is down 38%. As investors flee equities for cash, their appetite for riskier small-cap fare has fallen off the table amid a mentality that only the biggest and strongest firms are in a position to weather this downturn.

Now that we’ve got all the gloom out of the way, it should be noted that the market staged an impressive recovery move off the lows late in the session. The Dow actually rallied 2% today, and even though the Russell was down more than 2%, it was still more than 4% above the intraday low. More importantly, the strong rally off that intraday low left a potential double bottom on daily charts with the Oct. 10 bear market trough. If the market rallies away from this quickly, then it would provide an important successful test of the lows and would be one of the better bottoming signals we’ve seen on the charts.

Now, back to the sour news from today: American International Group (NYSE:AIG) CEO Edward Liddy said that the $112.8 billion bailout by the government “may not be enough” and the firm may need to tap into additional capital, which sent a collective groan through the financial markets.

The big negative elements in play today were the AIG comments, more talk of forced liquidation amid heavy redemptions, particularly in the leveraged loan market, Nick Kalivas, vice president of financial research with MF Global, said in an email interview. Kalivas also noted that commercial paper market was “plugged” and that earnings are lackluster as companies admit business isn’t going to get better any time soon.

In addition to financial stocks, homebuilders, airlines and retailers also took a hit on Thursday. The ISE Homebuilders Index was down a whopping 9% following a study by RealtyTrac this morning saying that foreclosures were up 21% from September 2007 and up a jarring 71% from the third-quarter of last year. They estimated that 1 in every 475 homes received a foreclosure filing in September.

Another economic data release early today — the weekly claims report — came in above the forecast, with some 478,000 Americans filing for unemployment insurance last week, about 13,000 above the forecast. Even though the number was goosed some 12,000 by Hurricane Ike, the lofty level of unemployment claims remains consistent a labor market recession and paints a sobering picture of the job market into the holiday season. Looking ahead to Friday, the market will get yet another glimpse of the housing front, with data on existing home sales due out at 10:00 a.m. ET.

Energy stocks were a source of solid support today for equities, underpinned by a $1-a-barrel bounce in crude oil prices ahead of this week’s OPEC meeting in Vienna. Oil ministers are expected to announce production cuts to battle sinking prices and slumping demand. Of course, that’s a double-edged sword that might help stabilize energy stocks, but undercuts embattled consumers, who could use even more of a break at the gas pump to fund critical holiday purchases moving toward the end of the year.

Individual small caps of note today included Belden Inc. (NYSE:BDC), which shed nearly 36% as the specialty electronics maker announced earnings that didn’t enthuse investors. Phoenix Technologies Ltd. (Nasdaq:PTEC) tumbled 35%, also tied to sloppy earnings news. Landamerica Financial Group Inc. (NYSE:LFG) was off 28% as title insurers continue to sink along with the housing crisis following news from Wednesday that Fidelity National Financial Inc. (NYSE:FNF) posted a huge quarterly loss. Bucking the overall slide in small caps, Vasco Data Security International Inc. (Nasdaq:VDSI) gapped higher and rallied some 28% as quarterly revenue and income set records for the firm.