Financials, growth talk pulls down small caps

Kevin Pendley | Aug 25, 2008 4:33pm EDT | Comment

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Small-cap stocks started out the week with a thud, sinking hard and fast amid concerns about the relentless credit crisis and a potential slowdown in global growth. The Russell 2000 (NYSE:IWM) tumbled 17.06, or 2.31%, to 720.54, generating the largest one-day decline in about four weeks. The Russell is now down 5.93% for the year, while the Dow is down 14.1% after slipping 2.08% Monday. The S&P 500 lost 1.96% today and is off 13.7% for the year.

Financial stocks were once again bloodied, as investors are not confident in bank, brokerage or insurance shares amid slumping economic conditions and uncertainty about the extent of debt write-downs emanating from the mortgage and housing swoon. American International Group (NYSE:AIG) tumbled to 13-year lows today, sinking 5.7% on analyst downgrades, and other financial stocks were also pummeled. The up-and-down (mostly down) world at Lehman Brothers Holdings Inc. (NYSE:LEH) took a turn for the worse today as concerns were voiced about the proposed Korean buyer that emerged late last week. LEH slumped 11.2% on the talk. The Financial Select Sector SPDR Fund shed 3.3% and the PHLX KBW Banking Index was off 3.2%. Nearly every large name bank was in the red today, and that selling momentum spread easily into small-cap financial stocks as well.

Fresh data on the housing arena failed to instill confidence in the bulls that things were ready to improve. Even though the headline figure on existing home sales came in above the forecast (plus 3.1% versus plus 0.9%), there were still troubling elements in the report, included a record high supply of homes on the market and steep price declines from last year. The market will get more data on the housing picture with Tuesday morning’s Case-Shiller Home Price Index, and then later in the morning from the New Home Sales report.

Financials and the never-ending credit crisis weren’t the only worries facing investors today. Talk that the International Monetary Fund was lowering global growth projections was troubling for technology, small-cap and industrial names, and today’s index losses were paced by the tech-laden Nasdaq 100 and the Russell 2000. Within the tech sector, big firms like Apple Inc. (Nasdaq:AAPL) and Research in Motion Ltd. (Nasdaq:RIMM) lost 2.3% and 3.1%, respectively. On the industrial front, Caterpillar Inc. (NYSE:CAT) and 3M Company (NYSE:MMM) were down 2.3% and 2.1%.

An interesting component of today’s downdraft in stocks is that it was not spurred by fears of commodity price inflation. Although crude oil futures finally closed up on the day, they were lower a significant portion of the session as energy traders were concerned about economic worries cutting into the demand side of things. Crude oil eventually closed up $0.52 a barrel at $115.11 and other commodity markets were also tame today as the Commodity Research Bureau Index was up just 0.08%. The U.S. dollar was mixed today, rising 0.26% against the euro, but sinking 0.66% against the yen, and seemed to have little overall impact on the decline in equities today.

The sheer breadth of selling interest today in stocks was eye-catching. Sellers took jabs at everything from financials to energy to apparel to casinos. In an ironic twist, there were only two positive sectors within the S&P sector breakdown — thrifts and home furnishings. Given the debacle of late in government-sponsored enterprises, it was odd to see thrifts such as Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) carrying the baton for the bulls today. FNM was up 7%, while FRE was up 18.2%, as a debt sale for the two embattled firms was gobbled up with ease, which eased some worries tied to the firms.

Individual small caps of note today included Quest Resource Corp. (Nasdaq:QRCP) and Quest Energy Partners (Nasdaq:QELP), both of which were tied to the resignation of leadership at the firms. QRCP tumbled 30%, while QELP was off 20%. Also, Healthways Inc. (Nasdaq:HWAY) was down 21%, gapping lower on unusually brisk volume as investors were cool to a soft outlook from the firm. On the upside, AgFeed Industries Inc. (Nasdaq:FEED) jumped 18% as the company will acquire more hog farms in southern China. Another stock with China ties also bucked the overall downdraft, as China Precision Steel Inc. (Nasdaq:CPSL) rose nearly 10% without any apparent fresh news to brace the move.

The chart picture for the Russell 2000 eroded considerably today, with the market pushing through important support along the 726 line. Persistent action below 726 will serve to validate the topping pattern drawn off the recent highs, and carries short-term downside targets to 711.50. For now, the dominant chart formations are all bearish, with a potential double top from the June and August peaks, and the recent harsh rejection of fresh more highs.