Small Caps Feel the Heat
Russell – Stocks tumbled hard Friday on a Non-Farm Payrolls number that surprised even the most pessimistic of investors. Not only did the economy only add 18,000 jobs for the month of December – far short of consensus estimates of 70,000 – but the unemployment rate jumped from 4.7 to 5.0 percent when the market was expecting no higher than 4.8 percent. These numbers underscore the economic pressures that the stock market has been feeling as of late. Corporate earnings have been fairly solid to date with the exception of companies with considerable subprime exposure, but forward guidance has been revised down, indicating that 2008 may be a tough year for corporate America. The Russell 2000 underperformed versus the major indexes in 2007 and the New Year may bring more bad news for the small cap sector. This is not surprising given that the Russell has outshined the broader market since the second half of 2004. With the lending market feeling the crunch of the subprime fallout, smaller cap stocks may find loans harder to come by than larger, more established institutions. This could result in many of our nation's smaller companies not being able to weather the storm in the event of a prolonged economic downturn or recession. The cash Russell 2000 index formed an ominous double top formation on the monthly chart, suggesting that the market may see significantly more downside during the year. The pattern measures a move to the second Fibonacci retracement support of 590. The March e-mini Russell suffered a near-term setback, falling below support at 735.00. The 9-day RSI has fallen into oversold territory, which could lend some support to the market in the near-term. Support comes in at 715.20, 703.10 and 684.20, while resistance can be found at 746.10, 765.10 and 777.10.
Gold – Gold futures are slightly lower this morning on a stronger U.S. Dollar and a decline in Oil prices. Both this morning's early selling and Friday's lackluster trading seem to have been driven by profit-taking. The fact that the market stayed in the red on Friday highlights the fact that buying pressure over recent weeks may have caused the market to become a bit strained. Fundamentals remain overwhelmingly bullish for the precious metals market, so the action or lack thereof over the past two sessions may be signaling consolidation before the market makes another push to historic highs. The daily February Gold chart remains very bullish and may be forming a bull flag if the market remains passive today. The RSI and stochastic indicators are signaling very overbought conditions, which is likely driving the profit-taking. The overbought readings may make it difficult for the market to break new highs in the near-term without cooling off first. Support comes in at 857.90, 850.00 and 843.10, while resistance may be found at 872.60, 879.60 and 887.50.
Crude Oil – Oil futures are lower for the third consecutive trading session on unseasonably warm weather across much of the eastern half of the country. Here in Chicago, temps are expected to reach highs in the low 60s – golf weather. This warming pattern is expected to reach the Northeast, which is likely to curb Heating Oil demand significantly. Oil traders have been locking in profits over the past two sessions due to overbought technicals and a lack of meaningful news on the geopolitical front. The slowing state of the U.S. economy has traders in a lull over the past three sessions, but has yet to cause any heavy selling pressure. Thursday's price action formed a spinning top reversal pattern, which may be contributing to some of the technical selling we have seen. The market has honored the $97 mark as support both Friday and in the early going today, but a sharp move below this level could bring more selling pressure. The 9-day RSI is falling back from overbought levels and is now being outpaced by the momentum indicator. Support comes in at 96.87, 95.83 and 94.56, while resistance may be found at 99.18, 100.45 and 101.49.
Rob Kurzatkowski, Commodity Analyst
