Russell extends slide as econ worries snap support

Kevin Pendley | Aug 19, 2008 1:02pm EDT | Comment

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Small-cap stocks remained under pressure into mid-session, anchored down by renewed concerns about the economic picture and by ongoing jitters over the credit crisis. The Russell 2000 (NYSE:IWM) tumbled to session lows, snapping chart support at 734 while moving within striking distance of key support at 726. At 12:35 a.m. ET, the Russell was down 11.71, or 1.58%, at 730.26.

Small caps were noticeably weaker than large-cap index products, with the Dow off about 1.11% and the S&P 500 down 0.92%. Small caps have outperformed all year long and were overbought on momentum readings coming into this week’s action. Looking at dozens of individual small-cap stocks, one theme keeps repeating: stocks that were making new move highs just last week are getting pounded as investors scramble to book profits.

That desire to step aside on equities was ignited Monday when financial shares came under renewed fire from worries about the credit crunch amid reports that several large players still are facing massive debt write-downs. On that same theme today, analysts cautioned that Lehman Brothers Holdings Inc. (NYSE:LEH) could take another $4 billion in mortgage-tied losses this quarter, and LEH stock took a dive approaching 9%.

Fresh economic data on inflation and housing failed to offer any immediate good news to counter the dour investor mood, as the Producer Price Index (PPI) climbed to 27-year highs on a yearly basis. What’s more, the PPI also showed that inflation was creeping into other areas besides gas and food, which makes it harder to discount the data by pointing at recent declines in energy prices.

On the energy front today, crude oil prices were actually sinking, moving back toward $112 a barrel, as energy traders fret about soft demand from slumping economic conditions around the world. In addition, the latest tropical storm to slam through the Gulf of Mexico region veered away from key production areas, which negated the need to build a storm premium into the market. The U.S. dollar softened as the stock market ebbed, with the greenback tumbling 0.6% against the euro and slipping about 0.3% against the yen. Elsewhere on the commodities front, grains prices were climbing today, as were coffee and cocoa, which meant that any relief from the soft tone in crude oil was being made up in other areas.

Even as investors came to grips earlier this morning with somber inflation data, a new report on housing starts also snuffed out hopes that the sector was nearing a bottom. Housing starts tumbled 11% in July, which was worse than the forecast for a 9.9% slide, and which marked the lowest unit rate in 17 years. As a result, homebuilder shares were on the defensive, with Pulte Homes (NYSE:PHM) down 3% and the ISE Homebuilders Index down 2.6%.

The combination of rising inflation and sluggish economic conditions puts the Federal Reserve in a difficult position, because they can’t raise interest rates to stave off inflation because it could risk sending the economy into a tailspin. Among monetary policy leaders, Dallas Federal Reserve Bank President Richard Fisher today said that the Fed must be ready to quell inflation concerns. Fisher’s opinion is notable in that he has dissented at policy meetings against keeping rates down in favor of raising them to combat inflation.

Individual small caps on the decline this morning included Innovative Solutions & Support Inc. (Nasdaq:ISSC), which announced plans to hold a conference call Thursday to discuss its fourth quarter outlook. ISSC shares collapsed 22% ahead of that call, wiping out a nice recent rally to move highs last week. Amicus Therapeutics Inc. (Nasdaq:FOLD), tumbled 10% after announcing quarterly results and First Marblehead Corp. (NYSE:FMD) was down 27%, giving back a large portion of the spectacular rise from Monday when rallied on news that Goldman Sachs completed an investment in the company. On the upside, TASER International Inc. (Nasdaq:TASR) jolted forward nearly 10% and is up some 34% from the last July lows.