Freefall on credit worries, global growth concerns

Kevin Pendley | Aug 25, 2008 1:12pm EDT | Comment

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Small-cap stocks fell hard into mid-session trading, pulled down by renewed concerns about the ongoing credit crisis, which continues to haunt the financial arena. In addition, fretting about a global growth slowdown kept tech stocks and industrial shares on the defensive. At 12:45 p.m. ET, the Russell 2000 (NYSE:IWM) was down 17.79, or 2.41%, at 719.81.

The International Monetary Fund has lowered its global growth forecast for the next two years, which could stunt expansion for tech stocks and industrial companies that sell aggressively overseas. Small-cap stocks have tended to mirror price action in the tech arena of late and both the Russell 2000 and the tech-laden Nasdaq 100 were pacing today’s sharp slide in equities.

Financial stocks were sinking once again today, with the PHLX KBW Banking Index off nearly 3%. Almost every big-name financial, bank and brokerage stock was in the red today, which spilled into the smaller-cap financial names as well. Jitters about the financial situation were heightened by yet another bank failure over the weekend, as Federal regulators seized control of the Columbian Bank and Trust Company, which marked the ninth bank failure of the year.

Regional banks and insurance firms were among the worst performers today in the stock market, but the array of losing sectors was surprisingly diverse, with steel, construction materials, casinos and electrical equipment manufacturers all incurring stiff losses. The only sector seeing decent gains today was home furnishings…it is rare to see declines spread across such a diverse area of equities.

Small-caps on the move today include Quest Resource Corp. (Nasdaq:QRCP), which was down about 25% amid news of a change in leadership positions at the firm. Also, Quest Energy Partners LP (Nasdaq:QELP), tumbled 18% on unusually brisk volume tied to the same news as QRCP. One of the few companies able to significantly buck the overall bearish mood was AgFeed Industries Inc. (Nasdaq:FEED), which rallied 17% on news that the firm was acquiring four commercial hog farms in southern China.

Crude oil prices were up and down so far today in thin, volatile trading and the dollar was taking a big hit against the yen, while holding flat against the euro. Today’s slide in stocks was clearly not simply a cause and effect tie to commodities, as the Commodity Research Bureau Index was flat and crude oil was not generating any move big enough to spark the dramatic decline in equities.

The drop in small-caps sent the Russell reeling through important chart support at 726. Sustained action below that point would serve to validate the recent topping pattern and carries an initial downside target test of 711.50. There is minor support ahead of that point at 714.50 if the market continues to sink into the afternoon. On the upside, 726 is now important resistance, then the next point is at 734.