Small caps tumble as crude oil rumbles

Small-cap stocks edged lower Thursday, unable to overlook a dramatic rally in crude oil prices and ongoing concerns about financial stocks. The Russell 2000 (NYSE:IWM) closed down 6.35, or 0.8%, at 725.25 and is now down 5.3% for the year. Small caps lagged the performance in the Dow and S&P 500, but were on a similar track to the Nasdaq Composite for much of the day. The Dow gained 0.1%, and is down 13.8% for 2008, while the S&P 500 was up 0.2% and is down 12.9% on the year.

The big story today was the energy market, with crude oil prices soaring some $5 dollars, or more than 5% a barrel back above the $120 barrier, while generating the largest one-day gain in about two months. If previous price action was any indicator, the stock market starts to get very queasy when crude oil prices rise above $130 dollars a barrel. When Goldman Sachs reiterated its call this week for $149 crude by year’s end, it sent shivers through consumer goods stocks, which stand to get the short end of the consumer stick if everyone has to start paying more than $4 a gallon at the pump — especially if food price inflation kicks into gear.

The Commodity Research Bureau Index went absolutely nutty Thursday, jumping 3.7%. This index of 19 physical markets covers more than just the energy component, and the rise in commodity prices today wasn’t just a one-trick pony. For instance, coffee was up 6%, sugar was up 3%, cotton was up 2.7%, silver shot up 5%, gold was up nearly 3% and copper jumped some 4%. The market has been trying to shrug off recent inflation reports on consumer and producer prices as “dated” pointing to the sharp slide off the highs in crude oil prices, but with commodities back on the prowl, it might make it more difficult to explain away the data next time around.

A big component of the surge in commodities on Thursday was tied to a sudden reversal in fortune for the U.S. dollar. The mighty buck had been on an impressive bullish charge in recent days, soaring to multi-month highs against the yen, pound sterling, the euro and a host of other currency markets, but went into a tailspin today, tumbling some 1.1% against the yen and over 0.9% versus the euro. Many of the world’s commodity markets — including crude oil — are priced in dollar . . .

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