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Big trouble could be brewing with small caps, financials

Traders on the floor of the New York Stock Exchange on April 11, 2014
Getty Images
Traders on the floor of the New York Stock Exchange on April 11, 2014

It's been a tough week for small caps stocks (not to mention the broader market), but both that sector and financials should be watched closely.

Small caps have suffered the most in the last couple days:

Russell 2000 down 3.0 percent

S&P Midcap down 1.7 percent

S&P 500 down 1.1 percent

Utilities up 0.9 percent

I would be more worried if we have continued deterioration in some large-cap banks, including regional names:

Bank of America down 2.8 percent

SunTrust down 2.8 percent

JPMorgan down 2.3 percent

KeyCorp down 2.1 percent

American Express down 1.6 percent

This should be watched carefully, since financials have been a market leader recently. I'm less concerned by what I see in another leader, Energy, since many of the bigger names in that sector have seen only modest declines this week:

ExxonMobil up 0.2 percent

Anadarko flat

ConocoPhillips down 0.3 percent

Schlumberger down 0.7 percent

Elsewhere

The Container Store's disappointing earnings report can be summed up this way: it's not us, it's the consumer.

After the close yesterday, the company reported earnings below expectations and said full year profit and revenue expectations would also be below expectations. Negative comparative store sales was a surprise, since guidance has been for up 3 to 4 percent for the year.

Overall, TCS's woes are a problem, because without consistent comp store growth (think Costco), the bulls are going to re-evaluate their enthusiasm for the company. Here's are additional thoughts from Chairman and CEO Kip Tindell:

"We thought our sluggish sales were all because of weather and calendar shifts that began last November and continued into the spring, but now we've come to realize it's more than the weather and calendar. Consistent with so many of our fellow retailers, we are experiencing a retail 'funk'… we continue to experience slight traffic declines in this surprisingly tepid retail environment. While consumers are buying homes and automobiles and even high ticket furniture, most segments of retail are, like us, seeing more challenging sales than we had hoped early in 2014 - so we're not alone in this."

This is strange, considering that TCS is known to have higher-income households that are supposedly in better shape than everyone else. While they are not Nordstrom, it's definitely attracts higher-end consumers. Williams Sonoma are is doing well, but Bob Evans also reported sales short of estimates, and cut earnings guidance for the year.

2) Airlines are taking flight, finally. American's helping, as June traffic was up one percent. And a key growth component—passenger revenue per available seat mile (PRASM)will be up approximately 5.5 to 6.5 percent versus prior guidance of approximately 4 to 6 percent.

3) There's an interesting story in The Wall Street Journal that short selling at its lowest in years. That's eye-catching, but bear in mind there are dozens of exchange traded funds (ETFs) that might allow investors to effectively short stocks using synthetic methods. That is likely a mitigating factor.

Same problem with the CBOE Volatility Index: it measures interest in buying protection using near-term options on S&P 500 stocks. It's near a multi-year low. However, there are many other ways for investors to buy protection now that is not measured by the VIX.

My point: it's not clear how well the VIX accurately measures the "fear" in the market.

--By CNBC's Bob Pisani

Symbol
Price
 
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%Change
S&P 500
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US 10-YR
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.RUA2
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S&P 400
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UTIL
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BAC
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STI
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JPM
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KEY
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AXP
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XOM
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APC
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COP
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SLB
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AAL
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TCS
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COST
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JWN
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VIX
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WSM
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BOBE
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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street