Profit worries weigh on small caps

Kevin Pendley | Jan 12, 2009 10:19am EST | Comment

Rating: Unrated [rate it]

Small-cap stocks edged lower in a fairly weak start to this week’s trading, pulled down by worries about corporate profits as we enter the unofficial start of earnings season this afternoon. Energy and commodity stocks were a source of worry early today as crude oil futures extended the recent slide. At 9:57 a.m. ET, the Russell 2000 (NYSE:IWM) was down 5.31, or 1.10%, at 475.99.

Crude oil prices tumbled more than $2 a barrel into the U.S. stock market opening, which could pull down energy stocks. The dollar was firm against the euro this morning, which could also weigh on other commodity markets and stocks with close ties to physical markets.

Tying together the commodity and profit themes, Alcoa Inc. (NYSE:AA) kicks off the earnings season after the close today. The firm already announced plans to slash 13,500 jobs and reduce output and will release quarterly results after the close today.

Overseas markets were lower coming into today’s session, which likely weighed on the market as well. In European and Asian trading, bank stocks and chipmakers were taking a hit. Here in the U.S., investors will watch progress on a deal between Citigroup Inc. (NYSE:C) and Morgan Stanley (NYSE:MS), in which Citigroup plans to sell its Smith Barney brokerage unit to raise cash.

The market did take a hit on Friday and the news so far today was soft, but not overly surprising, which could make it difficult to attract fresh selling, especially ahead of a raft of economic numbers later this week. There was an acquisition deal involving a small-cap firm this morning, and when deals get done, it often stokes bullish enthusiasm, especially in the small-cap arena.

Advanced Medical Optics Inc. (NYSE:EYE) will be purchased by Abbot Laboratories Inc. (NYSE:ABT) for $1.4 billion, which sparked a big rise in EYE shares on the opening. EYE was up 144% on the news.

Other small caps on the move this morning included Satyam Computer Sevices Ltd. (NYSE:SAY), which was down 90% as the NYSE finally opened up trading on the embattled Indian outsourcer and the U.S. markets caught up with the collapse already registered on Indian trading last week after the firm’s chief resigned and said that the firm has overstated profits for years. Landrys Restaurants Inc. (NYSE:LNY) tumbled 38% as the restaurant operator said a merger deal was terminated and that they were looking for alternative financing. Encore Energy Partners LP (NYSE:ENP) was down 20%, falling hard to give back a strong rally from last week.

From a technical analysis perspective, the chart structure has rolled over into a bearish posture, including bearish cloud cover on weekly candlestick charts and a failure at logical resistance last week. The bearish tone was magnified by Friday’s strong slide through 491 support and the market is rapidly approaching important support this morning at 473. A breach of that point would heighten the risk of a slide to 450 and perhaps beyond. Under 473, there is mild support near 464 and a better level near 461. On the upside today, resistance is at 481 and 491.