Volatile day ends with mild dip for small caps

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Small-cap stocks turned lower Tuesday, rejecting an impressive morning rally as financial and tech stocks failed to gain traction even with the benefit of a sharp pullback in crude oil prices. The Russell 2000 (NYSE:IWM) closed down 0.99, or 0.13%, at 738.51. For the year, the Russell is down 3.5%, which is quite a shift from the morning rally when the Russell looked poised to post one of the highest daily settlements of the year. The selling pot was stirred among large caps too, with the Dow slipping 0.2% on the day; the Dow is now down 13.1% for the year. In addition, the S&P 500 lost 0.4% Tuesday and is off 13% for 2008.

The dramatic reversal in fortune for stocks today left a mild bearish reversal formation on daily charts as the Russell closed lower after threatening to challenge move highs in the morning. In addition, when a market sinks in the face of seemingly bullish news, it is often considered a classic signal that something else is wrong. In this case, the market seems to be saying that a little relief at the gas pump isn’t enough to fix what ails the economy or the credit crisis.

It’s interesting to note too that the erosion in stocks seemed to coincide with a surge in Treasury markets. The yield on the benchmark 10-year note tumbled nearly 2% to the lowest closing level since late April. Yields move inversely to price, which means that demand for Treasury products (a traditional safe-haven) was strong today. Some of that push for a safety net seemed to move in tandem with the Fitch downgrade of paper debt for mortgage lending giants Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). If there were concerns in the market about the government-sponsored enterprises, they didn’t really show up in the stock, as shares in FNM rose 8%, while FRE jumped 14%.

The day dawned brightly for equities as investors embraced a huge slide in crude oil prices. Even though the stock market turned lower in the afternoon, crude oil prices still lost about 5% on the day, sinking $5.75 a barrel to $109.71. The stiff decline in energy prices was accompanied by a big rally in the U.S. dollar, and a whole host of commodity markets succumbed to the pressure — all of which would seem . . .

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