Small caps tumble amid financial, homebuilder slump
Small-cap stocks started out the week with a whimper as bleak manufacturing data, sinking financial and homebuilder shares and money flow away from equities took a toll on the market. The Russell 2000 (NYSE:IWM) closed down 15.86, or 3.39%, at 452.57 and is now down 41% for the year, while the Dow is off 35% and the S&P 500 down 41%.
Bank and financial shares have been a persistent drag on the market in recent days. The big news on the banking front today was an analyst downgrade on JP Morgan Chase and Co. (NYSE:JPM), which pulled down the rest of the financial universe. JPM shares lost 7.4% on the day, and the Financial Select Sector SPDR was off 4.1%. The market also was reluctant to buy bank and financial stocks ahead of earnings releases from Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS); both firms lost some 1% on the day. Treasury market yields tumbled some 2% on the day, indicating that money was moving toward safe-haven outlets in concert with the weak tone in equities.
A fresh batch of economic data today was predictably awful, with the New York Manufacturing Survey sinking to a record low and the industrial production report showing a decline of 0.6%. That said, both of the reports were actually better than forecast and a much worse reading on manufacturing overnight in Japan didn’t stop the Nikkei from rising 5.2%, so it would be presumptuous to blame today’s slide in equities just on the manufacturing picture.
Homebuilder stocks took it on the chin today, pulled down as Fitch lowered a large batch of homebuilder debt ratings. The ISE Homebuilder Index tumbled 5.7% and a raft of small-caps homebuilder stocks tumbled. Lennar Corp. (NYSE:LEN) fell 9.0%, while KB Home (NYSE:KBH) was down 6.3%, Centex Corp. (NYSE:CTX) was off 7.2% and Brookfield Homes Corp. (NYSE:BHS) shed 14.9%.
Even the crude oil market was unable to hold up in positive territory today as the decline in stocks whittled away early gains in energy markets. Crude oil prices actually reversed a morning rise of some $3 a barrel to close down $1.77, or 3.82%, at $44.51, a sloppy performance that coincided with energy stocks slipping from positive into negative territory by the afternoon.
But even though energy markets reversed course today, other commodity markets were still holding up reasonably well, underpinned by a steep fall in the U.S. dollar. The greenback tumbled a whopping 2.5% against the euro, more than 300 basis points on the day, providing a lift to commodity markets, which are primarily priced in dollar terms. There was some concern that the big fall in the U.S. dollar was spurred by foreign investors pulling money back out of the U.S. market after “hot money” traders poured funds into U.S. assets at a record clip in October. The Treasury Department reported that $286.3 billion poured into U.S. during October, but that long-term capital inflows, excluding swaps, actually dipped to $1.5 billion.
The market also could be chilled right now by the huge investor swindle from long-time Wall St. darling Bernard Madoff, who was arrested Friday and accused of operating a massive ponzi scheme that could add up to billions of dollars in losses for high-end clients. So far, the tally on losses appears to be above $20 billion and could continue rising as more details about investors come out.
One of the few bright spots on Wall Street today came from automakers, with General Motors Corp. (NYSE:GM) rising 3.5% and Ford Motor Co. (NYSE:F) up 4.6% as U.S. carmakers appear closer to getting a lifeline from the White House after Republican Senators shot down a $14 billion bill last week. President Bush reportedly said that an aid package for automakers “won’t be a long process” as the industry teeters on the brink of bankruptcy. Right ahead of the close, vice president Cheney said that if the auto industry were to fail it could be a “major shock” to the system, which adds to the hope that an aid package could come together quickly this week.
Individual small caps on the move today were highlighted by Huntsman Corp. (NYSE:HUN), which collapsed 49% on unusually heavy volume as the chemical company’s deal to be acquired by Apollo Management fell through. These are difficult times to close leveraged buyouts that were put together ahead of the collapse and just last week the biggest LBO ever, a $28.3 billion deal for BCE Inc. collapsed. Along that line of thought, Developers Diversified Realty Corp. (NYSE:DDR) plunged 21% as the shopping center management firm said that a deal they had to sell off assets would not close in December as previously hoped. Another mall operator, General Growth Properties Inc. (NYSE:GGP) fell 5% as it said a deal with a lender to extend the maturity rate on $900 million in loans had not been reached. Allis-Chalmers Energy Inc. (NYSE:ALY) tumbled 19% to fresh 52-week lows. On the upside, Safe Bulkers Inc. (NYSE:SB) rallied 17% as the marine drybulk carrier continues to show upside promise after bottoming out in late November.
The chart picture today turned a little more bleak with the afternoon breach of 450. Persistent action below 450 hinders the bottoming argument and sets the stage for either a test of the bear market lows, or a prolonged range at lower levels. The next key downside spot to watch is at 416, although there should be support along the way at 433 and 424.50. If the market can stage a bounce Tuesday, then resistance is up at 461, 473 and 491. In the morning, the market will get a chance to react to housing starts, but the big news will be the afternoon statement that accompanies the latest rate cut by the Federal Reserve.
Bank and financial shares have been a persistent drag on the market in recent days. The big news on the banking front today was an analyst downgrade on JP Morgan Chase and Co. (NYSE:JPM), which pulled down the rest of the financial universe. JPM shares lost 7.4% on the day, and the Financial Select Sector SPDR was off 4.1%. The market also was reluctant to buy bank and financial stocks ahead of earnings releases from Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS); both firms lost some 1% on the day. Treasury market yields tumbled some 2% on the day, indicating that money was moving toward safe-haven outlets in concert with the weak tone in equities.
A fresh batch of economic data today was predictably awful, with the New York Manufacturing Survey sinking to a record low and the industrial production report showing a decline of 0.6%. That said, both of the reports were actually better than forecast and a much worse reading on manufacturing overnight in Japan didn’t stop the Nikkei from rising 5.2%, so it would be presumptuous to blame today’s slide in equities just on the manufacturing picture.
Homebuilder stocks took it on the chin today, pulled down as Fitch lowered a large batch of homebuilder debt ratings. The ISE Homebuilder Index tumbled 5.7% and a raft of small-caps homebuilder stocks tumbled. Lennar Corp. (NYSE:LEN) fell 9.0%, while KB Home (NYSE:KBH) was down 6.3%, Centex Corp. (NYSE:CTX) was off 7.2% and Brookfield Homes Corp. (NYSE:BHS) shed 14.9%.
Even the crude oil market was unable to hold up in positive territory today as the decline in stocks whittled away early gains in energy markets. Crude oil prices actually reversed a morning rise of some $3 a barrel to close down $1.77, or 3.82%, at $44.51, a sloppy performance that coincided with energy stocks slipping from positive into negative territory by the afternoon.
But even though energy markets reversed course today, other commodity markets were still holding up reasonably well, underpinned by a steep fall in the U.S. dollar. The greenback tumbled a whopping 2.5% against the euro, more than 300 basis points on the day, providing a lift to commodity markets, which are primarily priced in dollar terms. There was some concern that the big fall in the U.S. dollar was spurred by foreign investors pulling money back out of the U.S. market after “hot money” traders poured funds into U.S. assets at a record clip in October. The Treasury Department reported that $286.3 billion poured into U.S. during October, but that long-term capital inflows, excluding swaps, actually dipped to $1.5 billion.
The market also could be chilled right now by the huge investor swindle from long-time Wall St. darling Bernard Madoff, who was arrested Friday and accused of operating a massive ponzi scheme that could add up to billions of dollars in losses for high-end clients. So far, the tally on losses appears to be above $20 billion and could continue rising as more details about investors come out.
One of the few bright spots on Wall Street today came from automakers, with General Motors Corp. (NYSE:GM) rising 3.5% and Ford Motor Co. (NYSE:F) up 4.6% as U.S. carmakers appear closer to getting a lifeline from the White House after Republican Senators shot down a $14 billion bill last week. President Bush reportedly said that an aid package for automakers “won’t be a long process” as the industry teeters on the brink of bankruptcy. Right ahead of the close, vice president Cheney said that if the auto industry were to fail it could be a “major shock” to the system, which adds to the hope that an aid package could come together quickly this week.
Individual small caps on the move today were highlighted by Huntsman Corp. (NYSE:HUN), which collapsed 49% on unusually heavy volume as the chemical company’s deal to be acquired by Apollo Management fell through. These are difficult times to close leveraged buyouts that were put together ahead of the collapse and just last week the biggest LBO ever, a $28.3 billion deal for BCE Inc. collapsed. Along that line of thought, Developers Diversified Realty Corp. (NYSE:DDR) plunged 21% as the shopping center management firm said that a deal they had to sell off assets would not close in December as previously hoped. Another mall operator, General Growth Properties Inc. (NYSE:GGP) fell 5% as it said a deal with a lender to extend the maturity rate on $900 million in loans had not been reached. Allis-Chalmers Energy Inc. (NYSE:ALY) tumbled 19% to fresh 52-week lows. On the upside, Safe Bulkers Inc. (NYSE:SB) rallied 17% as the marine drybulk carrier continues to show upside promise after bottoming out in late November.
The chart picture today turned a little more bleak with the afternoon breach of 450. Persistent action below 450 hinders the bottoming argument and sets the stage for either a test of the bear market lows, or a prolonged range at lower levels. The next key downside spot to watch is at 416, although there should be support along the way at 433 and 424.50. If the market can stage a bounce Tuesday, then resistance is up at 461, 473 and 491. In the morning, the market will get a chance to react to housing starts, but the big news will be the afternoon statement that accompanies the latest rate cut by the Federal Reserve.
About the Author
Kevin Pendley covers the Russell 2000 index for SmallCapInvestor.com and writes a weekly technical analysis column.
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