Small caps rally as oil sinks; FOMC no worry

Small-cap stocks put together a solid rally Tuesday, essentially recapturing the lost ground from Monday’s sharp decline. The market got an early boost from sinking crude oil prices, and extended those gains after the FOMC report failed to spark any fresh concerns. The Russell 2000 (NYSE:IWM) closed up 16.90, or 2.40% at 721.04. In the last three weeks, the market has generated one-day rallies of more than 2% on four occasions, which is an unusually large number of singular big-rally days jammed into such a short time frame.

Foreign exchange markets seemed to say that the Fed was on the right path, with the U.S. dollar jumping more than 100 basis points against the euro, and the dollar index climbing to the highest point since mid-June. In general, at this stage of the economic cycle, a strong greenback is seen as a sign of strength for the U.S. economy, and should encourage foreign asset flow into the U.S. stock market.

As for today’s big FOMC report, there was some mild intraday volatility associated with the statement, but the overall response was one of comfort. There is still a diversity of opinion about whether the Fed is in a position to fight inflation with tighter policy because of rising unemployment and soft economic conditions, but there also is a sense that the recent pullback in energy prices and other commodity markets may have provided the FOMC members with some valuable time and breathing room to combat a difficult situation...

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