Sellers making noise again as financials sink

Kevin Pendley | Oct 07, 2008 12:43pm EDT | Comment

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Small-cap stocks resumed the decline into mid-session trading Tuesday, unable to sustain an opening bounce as worries about the economy and slumping financial shares overshadowed supportive news on the credit front. At 12:29 p.m. ET, the Russell 2000 (NYSE:IWM) was down 10.13, or 1.70%, at 584.60.

Financial stocks — especially banks — were a drag on the market, with the PHLX KBW Banking Index down some 4%, paced by a whopping 15% slide in Bank of America Corp. (NYSE:BAC) as the nation’s No. 2 bank released disappointing earnings ahead of schedule and said they would slash dividends and raise $10 billion in capital.

Real Estate Investment Trusts (REITS) were also taking a hit today, as were financial services firms, investment banks and automotive manufacturers. The Financial Select Sector SPDR was down 2.4% at midday.

Commodity stocks were on the mend today, after getting clobbered for weeks on end. The U.S. dollar was off about 1% against the euro, which helped some commodities priced in dollar terms, and crude oil prices were higher, which lent a boost through the asset class. Interestingly, small-cap stocks were the weakest index product today, unable to find support from commodities after tracking those shares reasonably closely for weeks.

Losses were limited somewhat by oversold conditions and by enthusiasm for a new commercial paper facility that the Federal Reserve will open to help businesses access cheaper credit amid clogged lines. Still, the fact that the market has not been able to sustain rallies with that news suggests that investors remain troubled by the economic picture and don’t yet see the end-game on the long-running credit crisis.

Individual small caps on the move today included Ameristar Casinos Inc. (Nasdaq:ASCA), which tumbled 20% to multi-year lows. YRC Worldwide Inc. (Nasdaq:YRCW) was off 14%, also making new lows for the move. The Gabelli Utility Trust (NYSE:GUT) was down 18% and has fallen off the cliff the last two sessions after trading in a very narrow range for months on end.

Now that market is rolling back over into a selling mode, the bullish “hammer” pattern on daily candlestick charts has been quickly cast aside and there is very little convincing long-term support until the market gets closer to the 577 zone.