Small caps mount epic recovery despite ongoing financial scare

Small-cap stocks edged higher Thursday, shrugging off steep morning declines tied to the credit crisis as gains in commodity, manufacturing, transportation and tech stocks shifted focus away from the perilous financial landscape. In the end, the Russell 2000 (NYSE:IWM) closed up 1.83, or 0.26%, at 719.00; meanwhile, the Dow was up 1.46% and the S&P 500 was up 1.38%. For the year, small caps are still holding up much better than their big-cap brethren, with the Russell down 6.1%, the Dow off 13.8% and the S&P 500 down 14.9%.

At one point early this morning, the Russell was down more than 2% and appeared on the verge of a calamitous downside breach of key “figure” support along the 700 line. However, buyers came back into the market, braving not just fears about fragility in the financial arena, but also looking past a fresh batch of worrisome economic data as well. Tech stocks were clearly the early bedrock of the bulls, with the Nasdaq 100 never showing the kind of morning worries that seized other index products.

A key part of the mid-morning climb off those scary opening lows was yet another intriguing rally in commodity stocks, a rally that lately has defied price action in the physical market. However, as the day progressed, leadership on the buy-side shifted into the manufacturing, transportation and internet side of things. For the day, crude oil prices tumbled $1.71 a barrel to $100.87, while dipping to the lowest intraday point since April. In an interesting side note, the Commodity Futures Trading Commission today said that they could not say that speculators were to blame for the surge in oil prices this summer.

The sell-off in commodity markets was fairly broad in scope, pressured by a rise in the U.S. dollar, which made new multi-month highs against the euro, and 2 ½-year highs against the U.K.’s pound sterling. Normally, it would be convenient to highlight currency strength as a sign of international interest in U.S. assets, but the story appears to be primarily one of concern about global growth — particularly out . . .

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