Recession worries, soft retail sales set somber tone into jobs report

Kevin Pendley | Nov 06, 2008 4:30pm EST | Comment

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Small-cap stocks fell hard today as recession fears and sloppy retail sales kept the market on the defensive ahead of Friday’s big employment report. The Russell 2000 (NYSE:IWM) shed 18.79, or 3.65% to 495.84, losing nearly 10% in the first two days after the U.S. presidential election. For the year, the Russell is now off 35%, while the Dow is down 34% and the S&P 500 is down 38%.

The market was already reeling overnight when tech bellwether Cisco Systems Inc. (Nasdaq:CSCO) beat the earnings forecast but warned that revenues could fall hard quickly. As the day progressed, Cisco remained under pressure, but tended to outperform the indices. The bulls got a brief reprieve this morning when European bankers slashed interest rates, but the lift from that news didn’t have much shelf-life for U.S. equities.

Of course, it didn’t help matters that yet another economic report reflected a gloomy situation on the employment front — especially a day ahead of the Labor Department monthly reading on payrolls. After awful data earlier this week on manufacturing and service sector activity, this week’s unemployment claims came in above expectations, but the most sobering statistic was that continuing claims rose 122,000 to 3.84 million, the highest level in more than 25 years. A rush of dreadful economic data in recent days sets the stage for the “Grandaddy of Data” (yeah, Friday’s jobs report) to extend the glum reading of the nation’s economic picture. Esteemed researchers at Goldman Sachs already lowered their previous forecast for Friday’s non-farm payrolls — they are now predicting that a jolting 300,000 people lost their jobs last month (the consensus forecast is minus 180,000). Goldman also is looking for the unemployment rate to jump to 6.4%, up 0.3% from last month.

And just to reinforce the recession worries, same-store retail sales numbers came flooding in today; although there were some companies that did well, the cumulative total slumped to the worst monthly reading in about a decade as we head toward the crucial holiday spending period. A monthly confidence survey among corporate CEOs slumped to a record low when it was published this afternoon. The survey said that 66% of CEOs expect employment to fall in coming months.

It was a very difficult day to find a winning story. Among S&P sector groups, only homebuilders managed a 1% rise, but there were 10 sectors generating declines greater than 10%. Looking at asset flow, Treasury products should have been big winners given the rout in equities, but they were struggling to stay in positive territory. Meanwhile, commodities were getting hammered. Copper, a commodity market that is considered a key economic indicator, slumped 5%.

Crude oil futures tumbled to 19-month lows and yet airline stocks were grounded in negative territory; when those two markets trade in tandem you know that the recession is dominating psychology. Energy stocks were a major drag on the market, with the Energy Select Sector SPDR Fund sinking nearly 7%. And who would have thought that the Financial SPDR would sink more than 6% on a day when the Bank of England lowered interest rates to 53-year lows and the European Central Bank slashed 50 basis points off their benchmark rates?

Individual small caps of note included Syniverse Holdings Inc. (NYSE:SVR) which slumped 42% as the technology and businesses solutions specialist for telecommunications reported earnings. Another earnings slump was seen in Dupont Fabros Technology Inc. (NYSE:DFT), as the REIT and manager of wholesale data centers plunged 44%. Bucking the overall downdraft in the market, inVentive Health Inc. (Nasdaq:VTIV) jumped 38% as the provider of commercialization services to pharmaceutical and health care firms reported a jump in third-quarter revenues. Global Crossing Ltd. (Nasdaq:GLBC) rallied 19% as the IP solutions provider also got an earnings-related lift.

The chart picture seriously deteriorated the last two days after the rally stopped on a logical resistance zone. The freefall from 550 to 500 was startlingly quick, but somewhat predictable given a lack of decent support points between those zones. Now, the market must put up a fight in the 500 area because there are only token support points between 500 and the recent move lows down around 442. Looking ahead to Friday’s big jobs reaction, if the market does start to wilt through 500, then there is support near 480 and 460. Conversely, a bounce finds initial resistance along 514.50, then at 525 and 534.50.