Small caps turn negative as econ worries, REITS offset China news

Kevin Pendley | Nov 10, 2008 12:47pm EST | Comment

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Small-cap stocks turned lower into midday trading, pulled down by worries about the economy, sinking REITS, soft financial stocks and concern that a big stimulus plan announced by China overnight might not be enough to jolt worldwide economic conditions out of the doldrums. At 12:16 p.m. ET, the Russell 2000 (NYSE:IWM) was down 4.05, or 0.80% at 501.75. The Russell was the first major index product to slip into the red, beating the Dow and S&P 500 into negative territory by about an hour.

There are always concerns about how the numbers actually shape up when dealing with details out of China. Skeptics looked at the plan calling for $586 billion worth of stimulus and wondered if most of that money was already planned anyhow, or just how much would actually be put to work. Still, the overall sense was that the China news positive, but that there were still plenty of landmines to avoid in coming months.

Commodity shares were the top performers through the morning, bolstered by the China news, by oversold conditions and by a mild dip in the U.S. dollar versus the euro. Coal, agriculture products, aluminum, gold, metals and mining stocks and oil and gas drillers were among the top broad market sectors today. Meanwhile, anything REITS was getting hammered, as were automakers. Wireless telecoms and investment bank stocks were also attracting heavy selling.

Crude oil prices actually slipped into the red by midday, giving back $4 a barrel worth of gains from overnight. Energy traders continue to be ultra sensitive to declines in equities, fearing a troubled economy will squash demand.

It was interesting to see that the Commodity Research Bureau Index of 19 physical markets was only up 1.4% at midday, not all that dramatic of a move given the overnight rally in crude oil, gold and copper from the China news. Gold seemed to be best commodity performer, perhaps tied to inflation positioning down the road, but commodities in general were backing off the morning highs as the day progressed.

The new three-year note auction started up today and the results went well. Even though supply is an issue for debt markets, uncertainty about equity and commodity investments could shore up demand. At midday, the yield on both benchmark 10-year notes and 30-year bonds was down, which means price for the Treasury products was up.

What looked like a decent day for automakers turned sour when analysts downgraded General Motors Corp. (NYSE:GM), which sparked a 25% slide in GM stock. Ford Motor Co. (NYSE:F) went along for the bumpy ride, sinking 3%.

Real estate investment trusts (REITS) were a major drag on the market today and it didn’t help matters when Standard & Poor’s rating agency said that U.S. REITS may face more negative rating actions and that struggling capital markets and awful real estate fundamentals threaten REITS.

Individual small-caps on the decline today included Allied Capital Corp. (NYSE:ALD), which tumbled 32% on sloppy earnings results. Clear Channel Outdoor Holdings Inc. (NYSE:CCO) shed 23%, also taking a hit after releasing earnings figures. Southwest Water Company (Nasdaq:SWWC) slipped 21% as the water, wastewater and public works firm announced a delay in filings and a postponement on a conference call. On the upside, General Steel Holdings Inc. (NYSE:GSI) rallied 21%, gapping higher without any apparent fresh news. GSI is scheduled to release earnings on Friday.

Looking at the chart picture, the Russell failed a test this morning around the 514.50 zone, quickly retreating from a morning high just above 515. If the market slips through “figure” support at 500, there is short-term intraday support along the 495 line. Below there, only token support is seen down around 484 toward 480. On the upside, the market still has to tackle 514.50 with more conviction before moving toward 525 and 534.50. The market has basically been stuck in a range between 515 on the upside and 494 on the downside for 3 days and a breakout in either direction of that range would carry a target move of 21 handles, with the odds slightly favoring a downside resolution of the range.