Economic data, lukewarm earnings spark pullback

Kevin Pendley | Jul 24, 2008 4:26pm EDT | Comment

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Small-cap stocks went into a tailspin Thursday as soft economic data and uninspiring quarterly results took the teeth out of the buy-side mentality in equities. The Russell 2000 (NYSE:IWM) closed down 16.8, or 2.34% at 702.39, generating the largest daily loss since the market bottomed July 15.

Equity prices were vulnerable to a correction in here as short-term intraday momentum readings were overbought Wednesday and the market had already rallied some 12% off the lows in a short period of time. In addition, the chart structure after Wednesday’s session was top-heavy and the pattern paid immediate dividends with today’s sell-off.

Small caps were already on soggy footing ahead of the opening today when weekly unemployment claims came in above expectations, which painted a sour picture on the jobs front. The headline figure for weekly claims was at 406,000, which was well ahead of the forecast for a rise in the 380,000 range. However, airlines, automobile manufacturers and banks have been announcing layoffs lately, so the news wasn’t a complete stunner for stock market traders.

Although the market seemed willing to absorb the claims data without too much hand wringing, when the existing home sales report also came in worse than expected it started to raise concerns about the economic picture and kept equity bulls on the sideline. The home sales report showed a 2.6% decline to about 4.86 million units, which was below the forecast for 4.93 million. It marked the lowest level in 10 years and the median price for a home was down some 15% from last year.

Normally right now trading action in the stock market would be dominated by earnings results, and we are in a flood of quarterly figures but the investment public did not seem to latch onto a theme that could overcome the dour economic data. Instead of the latest batch of earnings suggesting a brighter story that would spread out to the entire market, there were pockets of good news and pockets of bad news. One major difference today is that the market was unable to build up a positive story in the financials, which had been a key force of strength during recent gains. The Financial Select SPDR tumbled over 5% and jitters on the outlook spread into the manufacturing arena as Boeing (NYSE:BA) tumbled some 7% after sloppy earnings.

Tech stocks were stronger relative to other index products, but even those stocks were pulled down amid the gloom today. Solid results for Amazon.com (Nasdaq:AMZN) helped provide underlying support to the tech area, with AMZN up about 13% after decent quarterly earnings news.

Crude oil futures shook off mild overnight losses to close about $1 dollar a barrel higher today near $125, which might have contributed to the blues in equities. Still, crude oil prices are down some $22 dollars off the recent highs, or nearly 15%, and the sudden turnaround in energy markets has been a supportive element for the stock market recovery.

Broad market sectors on the slide today included thrifts and mortgage finance firms, homebuilders, automobile manufacturers, consumer finance shares, industrial and residential REITS, real estate management, semiconductor equipment and hotels. Sectors bucking the downdraft were highlighted by Internet retail, employment services, gold, fertilizer and biotechs.

Small caps taking a hit included TechTarget Inc. (Nasdaq:TTGT), which gapped lower and tumbled 30% on unusually heavy volume following disappointing earnings news. UAL Corp. (Nasdaq:UAUA) was down 24%, giving back a large chunk of sizable gains the previous two days on the crude slide. Gencor Industries Inc. (Nasdaq:GENC) was down 19% and Sturm Ruger & Co. Inc. (NYSE:RGR) was off 26%, gapping lower on earnings. On the upside, Penson Worldwide Inc. (Nasdaq:PNSN) jumped 28% after solid quarterly results. Vital Signs Inc. (Nasdaq:VITL) rallied some 26% on news that General Electric (NYSE:GE) will buy the company for $860 million in cash.

Looking ahead to Friday’s action, the market will get a few more minor economic reports to ponder, including data on durable goods, consumer sentiment and new home sales. None of these reports are typically major needle movers, so if there is a big story on “name” corporate earnings overnight it could easily shift trader focus back to the profit picture.