Profit-taking, rescue vote jitters, soft data tug down small caps

Kevin Pendley | Oct 01, 2008 10:18am EDT | Comment

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Small-cap stocks opened lower, pulled down by profit-taking from hot money traders who caught the big rally Tuesday, a batch of soft private employment reports and reticence ahead of Washington’s latest vote on the financial bailout package. At 10:03 a.m. ET, the Russell 2000 (NYSE:IWM) was down 8.65, or 1.27%, at 670.94.

Although the market is starting to take more notice on the economic data front ahead of Friday’s big jobs release, the lion’s share of attention is still squarely on the surprisingly uncertain world of politics and the proposed $700 billion bailout of Wall Street after House Republicans voted down a bill authored by the Republican administration. The latest version of the bill — with new “extenders” included, is up for a Senate vote later today. Although nothing is certain in politics, especially in an election year, there is a sense among market watchers that some version of the rescue plan will be approved by the end of the week.

As for the economic reports already in hand this morning, stock index futures appeared to briefly extend overnight declines after the ADP Employment survey showed a decline of just 8,000 jobs last month, which was better than the forecast for a slide of 60,000. Even though the number would seem supportive, August was revised downward slightly and traders are well aware that the ADP number has not been tracking well with the Labor Department release, which is slated for Friday morning. A consensus of economists is forecasting the Labor Department to show a decline in non-farm payrolls of 100,000 and an unemployment rate of 6.1%.

In other economic news, the ISM Manufacturing Survey came out at 10:00 a.m. ET, and the headline figure was at 43.5, which was well below the projection of 49.8. The dollar gave up some of its overnight gains after the weak ISM figure, interest rates pushed higher and Fed funds futures edged above a 50% chance for a rate cut in October.

Earlier in the morning, another private employment report from consulting firm Challenger, Gray and Christmas Inc. showed layoffs rising 7.2% for the month and up 33% from year-ago levels. Analysts with Challenger also said that the fallout from September’s rocky period on Wall Street could be felt in the employment numbers for several weeks to come.

The cost of borrowing money at the interbank level continues to rise, which reflects the tight credit constraints facing the market. The “Libor” rate was at the highest point since January and the eurozone equivalent was at 14-year highs, showing that uncertainty reigns in credit markets. The yield on benchmark 10-year notes and 30-year bonds (which move inversely to price) was down a sharp 2% into the stock market opening, which reflects demand for a safe-haven port.

The U.S. dollar was on firm footing this morning, climbing back above 1.4000 euros, up about 0.7% against that currency while holding steady against the Japanese yen (until the ISM report sparked a slide in the buck). However, the rally versus the euro appears to be more about a weak tone in eurozone investments than a renewed faith in U.S. market. The firm tone in the greenback was a negative for crude oil prices, which were off nearly $2 a barrel into the stock market open. The weekly inventory report should come out around 10:35 a.m. ET, and is expected to show an increase in crude oil stocks of about 2.4 million barrels.

General Electric Co. (NYSE:GE) was off 7.1% right after the open, pressured by an analyst downgrade overnight. GE is often seen as a nice proxy for the overall economy, so the dip in GE shares was a negative for a broad swath of industrial and consumer stocks this morning.

Earlier this morning we reported that Catalyst Health Solutions Inc. (Nasdaq:CHSI) had collapsed 96%, but the drop was due to a technical Nasdaq glitch that also affected companies such as Google, Inc. (Nasdaq:GOOG). True pricing in Catalyst Health's stock has not changed and its shares are currently trading at normal levels. Greenlight Capital Re Ltd. (Nasdaq:GLRE) has been on a very rocky ride in recent days, and after a huge rally Tuesday made new move lows this morning, sinking some 30% on the opening. Aruba Networks Inc. (Nasdaq:ARUN) was off about 12%, slipping to the lowest point since July. Bucking the overall downdraft, ICx Technologies Inc. (Nasdaq:ICXT) rallied 13% on news that the firm won a contract from the U.S. Army.

The chart picture retains a bearish bias, as most of the dynamic chart patterns in recent months have been bearish in nature. The inside session rally Tuesday lacked conviction, and today’s lower opening only adds to the uncertainty of Tuesday’s validation. Look for support today at 666, then major support is at 660. The market has repeatedly rallied off the 660 to 650 in recent months, so a decisive breach of that area would be a big deal.