Late swoon; energy slide, safe-haven push hurts equities

Kevin Pendley | Dec 18, 2008 4:24pm EST | Comment

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Small-cap stocks finished off an up and down session with a jolting afternoon decline, as pressure from tumbling commodity stocks, weak profit reports and money flow away from equities toward credit instruments offset support from airlines and insurance companies. The Russell 2000 (NYSE:IWM) closed down 7.42, or 1.53% at 479.17 and is now down 37% for the year. Meanwhile, the Dow is off 35% for 2008, and the S&P 500 down 40%.

The market tried to stand tall through another batch of dreary economic data, but came up empty in the afternoon. The weekly unemployment claims report showed that 554,000 Americans filed for unemployment insurance last week, which might have been a drop from last week’s 26-year high, but was still a gloomy number in its own right. The four-week moving average for claims rose to 543,750, which itself ranks as the highest level in more than a quarter of a century. Data on mid-east manufacturing and leading economic indicators was predictably sour, but not a surprise.

Speaking of the economy, Federal Reserve Bank of Dallas President Richard Fisher said that the Fed “will not shy from pursuing every practicable means of supporting the functioning of financial markets and stimulating the economy back to a steady state by employing new techniques that fit the current circumstances.” What that means is that the Fed isn’t necessarily out of bullets just because interest rates are now effectively zero. Fisher said that the Fed would expand purchases of mortgage backed securities if that seems like a productive path. He also predicted that GDP would shrink 4% to 5% in the fourth quarter and that contraction was possible through the first half of 2009, with unemployment possibly rising beyond 8%. Fisher said that recent moves are starting to gain traction in credit markets but intimated that operations are still far from normal.

The yield on benchmark 10-year notes approached 2% today, reaching the lowest point in 50 years as investors continue to gobble up credit products as a safe-haven in a difficult environment for stocks. The 10-year yield (which moves inverse to price) was off a whopping 4% to 2.08%, while the bond yield was down 3.6% to 2.54%.

General Electric Co. (NYSE:GE), often seen as a bellwether for stocks, the economy and all things in between, tumbled some 8% today as Standard & Poor’s rating agency threatened to yank its “AAA” credit rating on the firm, saying that there is a 33% chance that GE’s rating could be lowered in the next two years.

Arguably one of the most unnerving pictures on the economy today came from the commodities markets, where crude oil has been the poster child for slumping global demand amid recessionary conditions. Crude oil prices tumbled 9%, or $3.84 a barrel today, slipping to fresh four-year lows during the session. Recent declines in crude oil prices have come despite OPEC leaders pledging to slash output, which means that the market remains worried about demand, and also that they don’t trust OPEC to hold down production. Energy stocks paced the market’s afternoon slide, losing some 5%.

Elsewhere in commodities, a recovery rally in the U.S. dollar may have taken some steam out of things, with the greenback reversing a big overnight decline against the euro to rise 1.2%. The iPath GSCI Total Return commodity index fund fell 3.7% and the Commodity Research Bureau Index was down 2.7%, even though some isolated markets, such as cocoa and orange juice, sported solid rallies today.

Individual small caps on the decline today were highlighted by Take Two Interactive Software Inc. (Nasdaq:TTWO), as the video game developer gapped lower and shed some 26% as the publisher of “Grand Theft Auto” missed the profit forecast and projected first-quarter results below previous expectations. With November video game sales up 10%, it appears that TTWO has issues more with its own product line than the industry overall faces. Stone Energy Corp. (NYSE:SGY) tumbled 21% as the oil and natural gas company updated guidance and 2009 production plans. Tennant Co. (NYSE:TNC) fell 19% as the surface coating firm announced a restructuring program to adjust for slower sales. The Einstein Noah Restaurant Group (Nasdaq:BAGL) fell 16% without any apparent fresh news to power the move. Bucking the overall market downdraft, G III Apparel Group Ltd. (Nasdaq:GIII) jumped 26% as the outerwear and sportswear manufacturer shot above the 20-day moving average for the first time since late October on solid volume. Emeritus Corporation (NYSE:ESC) rose 22% as the assisted-living care provider pushed above $10 a share for the first time since Nov. 11.

One has to wonder if some of the late plunge in stocks was fueled by expirations volatility ahead of Friday’s “quadruple witching” expirations on options, index products and single stock futures. With this being year-end and the market coming off a historic quarterly collapse, it could make options expirations an interesting sideshow on Friday. The typical way to approach expirations is that the market often favors the directional bias in play for the time period (in this case, October into December) as traders parked the wrong direction are forced to give up the fight.

Looking at the chart picture, the market once again failed to sustain an attack on key resistance near 491. Even today’s two-handle breach of that line didn’t hold up and the Russell left a bearish reversal on daily studies by making fresh move highs, then closing lower. Until we get a decisive close above 491, it will be difficult to put too much faith on short-lived rallies. Going into Friday’s session, support comes in at 473 and 461, while resistance is at the aforementioned 491 and 504.