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US SMALL/MIDCAPS-Small-cap fall could hinder rebound
September 26, 2012 / 8:37 PM / 5 years ago

US SMALL/MIDCAPS-Small-cap fall could hinder rebound

NEW YORK, Sept 26 (Reuters) - The S&P 600 SmallCap index fell further below its intermediate up trendline on Wednesday, and combined with breaches of trendlines in other indexes, it could hamper a rebound in equities after three days of declines in U.S. markets.

The small-cap index broke an uptrend line on Monday that connects lows in August and September. Chart-minded analysts see violations of an index’s trendline as an indication that the markets trajectory may be changing.

The losses come as investors are questioning whether the recent rally, which was largely driven by central bank stimulus measures, still has legs in the face of sluggish economic growth and declining U.S. corporate earnings.

“Working against the bulls is that the (Nasdaq composite) and the (Nasdaq 100) and S&P 600 small-cap index have already violated their respective intermediate uptrend lines, which could be a problem if the next rebound effort is internally suspect,” said analysts at Instinet in a note to clients.

The broad market fell as renewed turbulence in the euro zone over financial bailouts led investors to book profits as a strong third quarter nears an end.

Violent protests in Madrid against expected austerity measures and growing talk of secession in Catalonia increased pressure on Spanish Prime Minister Mariano Rajoy as he maneuvers before asking euro zone policymakers for rescue money.

Meanwhile, Greece faced its biggest anti-austerity protest in more than a year as international lenders admitted to difficulty in working out how to solve Athens’ debt crisis.

The S&P MidCap 400 index fell 0.7 percent while the S&P SmallCap 600 index also lost 0.7 percent. In comparison, the benchmark S&P 500 dropped 0.6 percent.

A substantial rally over the summer months had driven both indexes to new highs as the Federal Reserve and the European Central Bank acted to stimulate their economies.

The small cap index and the mid cap index have both gained about 12 percent so far this year.

David Bianco, U.S. equity strategist at Deutsche Bank, cautions over chasing the equity rally further.

“Although ECB and Fed actions have reduced tail risks, global growth, especially manufacturing and Asia construction, have yet to show signs of an upturn,” Bianco said in a note this week. He also said uncertainty generated by the November U.S. presidential elections and weak third0quarter earnings would hurt the stock market.

Shares in Zumiez Inc rose 7.7 percent to $27.35. Analysts at Janney Capital Markets expect the sports apparel and footwear retailer’s September sales to benefit from the back-to-school season and reiterated the stock’s “neutral” rating.

Omnova Solutions Inc fell 12.3 percent to $7.67. The U.S chemicals company reported a third-quarter profit below analysts’ estimates, hurt by a surge in costs and a decline in prices.

Magnum Hunter Resources shares fell 2.9 percent to $4.32. The oil and gas producer said it shut about 400 natural gas wells in Kentucky in the current quarter due to reduced natural gas prices and higher transportation costs.

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