Soft dollar, financial jitters weigh on small caps

Kevin Pendley | Aug 25, 2008 10:13am EDT | Comment

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Small-cap stocks edged lower in morning trading, pulled down by a soft tone in the U.S. dollar and by renewed jitters in the financial arena following yet another bank failure over the weekend. At 10:03 a.m. ET, the Russell 2000 (NYSE:IWM) was down 8.03, or 1.09%, at 729.58.

The existing home sales report came in with mixed signals; the headline figure was plus 3.1%, which beat the forecast for a more tame rise of 0.9%. However, the inventory of homes was at a record high and prices are still down steeply from last year.

Regulators closed Columbian Bank and Trust Company, which marked the ninth bank failure this year as financial institutions struggle with debt write-downs and bad loans emanating from the housing meltdown.

Also on the financial front, Lehman Brothers Holdings Inc. (NYSE:LEH) was down 8.6% shortly after the opening as questions surrounding a potential purchase of the firm by the state-run Korea Development Bank have emerged. The Financial Select Sector SPDR Fund was off almost 2% in early trading.

Crude oil prices climbed back above $115 dollars a barrel overnight, but sliced away much of the overnight rise ahead of the U.S. stock market opening. After the largest one-day decline Friday in nearly four years, traders will keep a close eye on crude prices to see if they experience a snap back move higher this week. The dollar was down against the yen, but basically flat versus the euro; a stronger tone in the greenback has been an important ingredient in the recent pullback in energy and other commodity markets, allowing investors to shrug off recent awful inflation data as out of touch with the sudden summer swoon in energy markets. However, if crude starts to recover back above $120 to $125 a barrel, then it could usher in a dark cloud on the price pressure issue.

Even though crude oil prices pulled back from the overnight highs, consumer and airline stocks were still on the defensive this morning, perhaps leery that energy prices could see a corrective bounce early this week. Bellwether discount retailer Wal-Mart Stores Inc. (NYSE:WMT) was down about 0.4%, while the AMEX Airline Index was down about 3%.

Broad market sectors on the decline were paced by apparel and accessories shares, real estate management, tire and rubber stocks, motorcycle manufacturers, insurance, department stores and airlines. On the upside, home furnishings, oil exploration, oil refining, fertilizer, coal, metals and mining stocks were the best performers.

Individual small caps on the move were highlighted by Healthways Inc. (Nasdaq:HWAY), which gapped lower, and tumbled some 24% as the company revised the yearly outlook. Gilat Satellite Networks Ltd. (Nasdaq:GILT) also gapped lower and lost about 11% as a proposed buyout of the company came to a stalemate. Lifeway Foods Inc. (Nasdaq:LWAY) slipped nearly 8% without any fresh news. On the upside, Allion Healthcare Inc. (Nasdaq:ALLI) rallied 9% and is now at 10-month highs.

As the day progresses, chart support for the Russell comes in at 729, 726 and 720.50. If the market can stage a recovery bounce, then resistance is at 742 and 748. The zone right around 737 stands as a swing line for price action today, and the market failed the initial test of that swing line.