Opening slide on tap on weak financials, soaring crude

Kevin Pendley | Aug 21, 2008 8:59am EDT | Comment

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Small-cap stocks are expected to open lower, pulled down by worries about financial stocks, a jump in crude oil prices and a sharp downward thrust in the U.S. dollar. The Russell 2000 (NYSE:IWM) was down about 0.6% in after-hours trading, which would suggest a regular open near 727.20.

This morning’s weekly claims report finally wasn’t a big bearish surprise for the market, with the headline figure coming out at 432,000, below the forecast for 440,000. The immediate reaction in stock index futures was a two-handle bounce in S&P 500 futures, but the market was still in negative territory in the first few minutes after the report came out.

The credit crisis has re-emerged as a trouble spot for the U.S. economy and for the financial sector in general this week. In Wednesday’s trading, government-sponsored enterprises (GSEs) were hammered, and both Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) were lower again overnight.

The fresh news on the financial front this morning were a batch of analyst downgrades for several large financial stocks, including Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS), both of which were lower overnight. Also, the Financial Times said that Lehman Brothers Holdings Inc. (NYSE:LEH) would post further write-downs this quarter, and that stock was off some 4% in after-hours action.

Overseas investors were clearly spooked by the latest financial sector fears, with the dollar sinking hard against the yen, losing some 1.4% as the U.S. banking woes attracted some unwinding of short yen carry trades. The dollar was also down about 0.4% against the euro, fueled by the financial worries and also by the surge in crude oil.

Crude oil prices jumped some $2.5 dollars a barrel overnight, climbing back to the $118 level as tensions between United States and Russia fueled risk premium building, and as the soft dollar sparked some movement into energy.

The chart picture for small caps remains top-heavy following last week’s reversal off fresh move highs, which left a potential double top on weekly charts. The Russell is now back near a test of important short-term support along the 726 zone; if that area is broken with conviction today, then it could spark a push down toward 711 (with some support test also at 720.50 along the way). If the market can mount a recovery this morning off what is expected to be a soft opening, then resistance is at 742, then at 748.