The August Core Consumer Price Index (CPI) data did not do the market many favors on Wednesday, coming in a bit hot. CPI, alone, came in right on expectations, but seeing a push higher from last month won't do much to ease interest rate tensions.
I don't believe one month will put the Fed back on a collision course with another hike this year, but it does present a problem for small-caps. Even spurts of higher-than-expected inflation numbers, mixed with expected or slightly lower-than-expected numbers, will delay any easing of interest rates by months.
Small companies that hold variable-rate debt or low-rate debt that soon will need to be refinanced plus those that need to obtain new debt will find the path forward challenging.
Private companies may be out of luck generating their capital needs.
We may see some smaller public companies sell stock to raise capital, but my concern is that the stock will be heavily discounted from the market price and may include warrants to incentivize the stock buyer.
Including a warrant isn't always an immediate negative -- for instance, if the warrant is priced a good bit above the stock price, somewhere in the neighborhood of 20% to 50%. If the warrants have a cool-down period before exercise and expire in less than three years, I can see those as a win-win for the company and investor.
Unfortunately, I think we are seeing financing concerns getting priced into small-caps. The iShares Russell 2000 ETF (IWM) chart looks nothing like energy, tech or even financials.
We saw a sharp move lower after the recent breakdown from the bearish flag on Sept. 5. That action has been followed by a sideways move, consolidating the move lower.
Yesterday, we saw the support of that sideways move give way to the downside yet again. We'll be faced with a need to hold the August lows or see the possibility of a nasty bearish head-and- shoulders setup that points to the May and June lows around $172.
There are plenty of things working in this market. Small-caps are not one of them. There's no need to play with fire or try to be a hero here. Look elsewhere until this picture gets better.
