Largest daily loss of 2008 as financials sink

Kevin Pendley | Sep 15, 2008 4:32pm EDT | Comment

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Small-cap stocks collapsed Monday, generating the largest one-day decline of the year as investors seemingly lost confidence in the financial arena and their wrath was felt throughout nearly every corporate endeavor in the country. The Russell 2000 (NYSE:IWM) shed 30.50, or 4.23%, to 689.76, the lowest daily close since mid-July.

Just a month ago, small caps came within a whisker of moving into positive territory for the year. Now, the Russell is down 9.9% for 2008, while the Dow is off 17.6% for the year after tumbling 4.4% Monday and the S&P 500 is down 18.7% on the year, while shedding 4.6% Monday.

The headline news this morning was that the nation’s fourth-largest investment bank, Lehman Brothers Holdings Inc. (NYSE:LEH), would declare bankruptcy as the firm simply could not raise enough capital to counter massive losses tied to the credit crisis. This time around, the Federal government decided to let Lehman’s fate be decided by true market forces rather than to step in for yet another taxpayer infused bailout of a financial firm. The realization that Uncle Sam’s pockets only run so deep for these institutions mired in mountains of bad debt jolted shares in major financial corporations. American International Group Inc. (NYSE:AIG) seems to have assumed the unenviable position of the next firm with a target on its back — sinking 56% today, adding to massive losses already pinned on the firm in recent weeks.

News that the second-largest bank — Bank of America Corp. (NYSE:BAC) — would purchase massive investment bank Merrill Lynch & Co. (NYSE:MER) for some $50 billion was good news to MER, which rallied some 4%, but not necessarily embraced by BAC shareholders as the bank’s shares slumped 19%.

This September swoon has to be making market watchers long for the days when the biggest worries centered on whether or not crude oil prices were going higher. If you would have predicted six weeks ago that the stock market would fall apart while crude oil was busy losing nearly 50% of it’s value, people would have thought you were nuts. Not only has that come to fruition, but today’s epic collapse took hold on a day when crude oil prices crumbled more than $5 a barrel.

And it wasn’t just a crude oil story on the commodity storm front either; the Commodity Research Bureau Index collapsed 3.2% to eight-month lows, with key economic indicator markets like copper unraveling in the face of the financial market wipe-out.

Just how broad a swath did the selling fury slash today? Among S&P broad market sectors, the only group showing any kind of upside strength was soft drinks — and they were up less than 0.5%. Meanwhile, there were a staggering 10 sector groups that were down more than 10%. It’s not common to see more than one sector off that much in a single day …seeing 10 down 10% is jarring. What’s more, those sectors taking a beating included insurance, oil refineries, power products, coal, metals, diverse financial services and REITS. Apparently, a wide range of markets today felt the fury from Wall Street’s woes.

The sell-off in small caps accelerated in the final hour of trading, pushing the benchmark Russell 2000 below 692. Consistent action below that point would snap a key technical chart point and suggest that the rally off the summer lows was simply corrective in nature and not bottom forming. The market needs to show life fast, or else a retest of those summer lows is the most likely course of action. Looking ahead to Tuesday’s action, the market will look for the next support zone to come into play at 685, then at 676. Meanwhile, resistance on bounces should be seen at 700, then at 704.50 and 711.50. Small-cap stocks are now within four handles of a 20% decline off the record highs, which is the textbook definition of a bear market. That 20% figure comes in at 685.00.

Speaking of Tuesday’s session, the market won’t get much of a chance to take a breather, as key economic data on inflation and retail sales will come out before the regular market opening. Earlier today, lost in the shuffle of the massive financial rout were a couple of minor economic reports on industrial production and manufacturing in the New York area — neither report offered any consolation for the bulls. One thing today’s spooky market did was put the FOMC meeting Tuesday afternoon in a whole new light. Market watchers who were certain that the Fed was ready to start raising rates to battle inflation are now concerned that the Fed might need to cut rates once again to bolster an economy burdened by the credit crisis and rising unemployment.