TradeMaster Daily Stock Alerts Blog

Small-cap stocks are expected to open near steady levels as investors digest another bout of the credit crunch blues that emerged Thursday. However, a big rally in the U.S. dollar carries supportive elements that could counter those concerns today. The Russell 2000 (NYSE:IWM) was little changed in overnight trading, suggesting an open near 713.25.

The credit crunch came back into the spotlight Thursday after American International Group Inc. (NYSE:AIG) posted massive losses spurred by debt write downs. The big financial news so far this morning came from government-sponsored mortgage giant Fannie Mae (NYSE:FNM), which posted a big loss and announced it would slash dividends. FNM shares were off more than 10% during after-hours trading.

The productivity report this morning came in below expectations, with the headline number at 2.2%, vs. the forecast for 2.5%. The soft productivity release had very little immediate impact on the market, and the wholesale inventory data later this morning should be pretty much ignored by the trading community, which will leave the market free to focus on other issues outside of economic data.

The U.S. dollar took flight overnight, soaring a stunning 230 basis points, or 1.50% against the euro, reaching the highest point since late February against the eurozone currency. Around the world, demand for U.S. dollars was percolating, as the greenback hit a 1-year peak against the Canadian dollar; 11-month highs vs. the kiwi, 5-month highs against the Singapore dollar, 6-month highs vs. the Aussie, 5-month highs against the Swiss franc, and 17-month highs vs. the British pound. Normally, that kind of surge would reflect worldwide confidence about the U.S. economy and investments here, but in this case the move appeared to be powered by dovish comments from European Central Bank president Jean-Claude Trichet, which touched off fears about a worldwide economic slowdown.

The sharp advance in the greenback likely played a role in pulling down crude oil prices, which were off more than $2 dollars a barrel, slipping back below $118. In addition to the firm buck, there were hopes that the burning pipeline in Turkey could be back in operation sooner than expected. Crude oil is priced in dollar terms, so a strong currency can cut into demand for the product. A similar condition exists for many major physical markets, so the outlook on commodity price inflation could improve – at least for today.

Looking at the intraday chart, you can see that the Russell was unable to fill an opening gap down Thursday and eventually plunged aggressively into the close. We often see a market trade sharply in the direction of an opening gap when that gap is not filled within the first hour of trading. There is also a double top near the recent highs at 726, and that area stands as important resistance on any big rallies. Ahead of that zone, resistance comes in today at 720.50 and 724.00. Meanwhile, support is at 707.50 and 701.00.

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