Flat open on tap as strong durables erases overnight dip

Kevin Pendley | Aug 27, 2008 8:57am EDT | Comment

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Small-cap stocks are expected to open flat to slightly higher, with support from a bullish surprise on durable goods orders countered by a decline in the U.S. dollar overnight, a rise in crude oil prices and concern about banking woes amide the credit crunch. The Russell 2000 (NYSE:IWM) was up about 0.2% in after-hours trading, which suggests an open near 725.

The durable goods report came in much stronger than expected, with the headline figure at 1.3%, compared with the consensus forecast for a rise of just 0.1%. Stock index futures erased overnight losses in the immediate moments right after the report, with S&P 500 futures rising about four handles on the data.

At the same time that the durables report was released, Atlanta Fed President Dennis Lockhart gave a speech on inflation, and said that headline CPI will peak near the July level and that the current Federal Reserve monetary policy approach is consistent with an easing in overall inflation. Reading between the lines, it looks like the Fed leans toward protecting growth at this stage and will keep rates on hold for some time.

The Federal Deposit Insurance Corporation (FDIC) said that the level of troubled banks is at the highest point in five years, and the Wall Street Journal reported that the FDIC might have to borrow money from the Treasury to work through bank failures. Just last week, Columbian Bank and Trust Company — a small bank in Topeka, Kansas, became the ninth bank to fail this year.

Crude oil prices extended Tuesday’s climb overnight, and was up about $1.30 a barrel, above $117.50 heading toward the U.S. stock market open. Although higher energy prices can be a supportive element to energy names, more often than not in recent months higher oil prices have been an overall negative to stocks because it crimps consumer spending and slows the economy. Crude oil prices continue to rise as the market builds a risk premium watching Hurricane Gustav twist into the Gulf of Mexico. The Gulf harbors some 25% of U.S. crude production and about 15% of natural gas output.

The dollar was able to churn higher Tuesday even though commodities were in rally mode, but the greenback stumbled overnight, sinking about 0.7% against the euro and nearly 0.5% versus the yen. However, after the durables release, the dollar was down about 0.5% on the euro and only 0.3% against the yen.

Global equities were mixed to lower overnight, with Europe down about 0.5% heading into the U.S. session. In Asia, Japan was down about 0.2%, Malaysia off 0.3%, China down 0.3% and India down 1.3%. Taiwan was up 1.6%, Thailand and Indonesia up 1.1% and Hong Kong up 1.9%,

Stocks to watch today include various air carriers, which will likely be cool to the recent upswing in crude oil prices. In addition, analysts downgraded American Airlines (NYSE:AMR) overnight.

The chart picture retains a top-heavy bias and Tuesday’s slide through important short-term support at 726 only adds to the bearish tilt. If the Russell slips through Tuesday’s lows at 716.65, then the next support point to watch is near 711.50, which marked a bullish reversal on intraday studies. If the market can right itself today and push back above 726, then the next resistance zone from there is near 734.