Up, then down as cautious tone prevails despite Fed news

Small-cap stocks slipped back into the red after opening solidly higher. The opening brush into the green was powered by news that the Federal Reserve would open a commercial paper window that should help businesses fund operations. Additional support was tied to oversold conditions and bottoming patterns on daily chart studies after Monday afternoon’s recovery bounce that attracted some cautious bargain-hunting. At 10:00 a.m. ET, the Russell 2000 (NYSE:IWM) was down 1.24, or 0.21%, to 594.67.

The Fed’s announcement on commercial paper appeared to be the punch that truly packed power this morning, sparking some thought that this move could help unclog credit lines. Those concerns remained very much in play into this morning’s trading when inter-bank lending rates were still tight overnight. In addition, the commercial paper facility could take some of the edge off the calls for an emergency rate cut, which already seemed unnecessary at this stage since Fed funds have been trading below the target 2% level often in recent days anyhow.

That said, central bankers in Australia announced a stunning 100-basis-point decline in rates overnight, which did spark optimism for hefty coordinated rate cuts in the West as well. PIMCO, which manages the largest bond fund in the world, has already been calling for the Fed funds target to be slashed by 100 bps, preferably in concert with cuts by other worldwide central banks.

Price gyrations in futures markets right before the opening were volatile and extreme, with S&P 500 futures soaring 12 handles, tumbling 14 handles, then jumping 20 handles in the 30 minutes before the real opening. At first the market was underpinned by oversold conditions, then pulled down on disappointment when the Fed simply announced the timing for auctions already planned, then it roared back again when the Fed said they would start a new commercial paper facility. Tossed into the wacky seesaw trading were headlines that Iran forced down a U.S. fighter . . .

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