Bank stocks soar, but small caps still swoon

Small-cap stocks resumed the slide Tuesday, unable to draft higher off soaring bank and financial stocks as worries about an economic slowdown put a damper on the consumer spending outlook and corporate profit projections. The Russell 2000 (NYSE:IWM) closed down 16.24, or 2.84%, at 554.65. At one point late in the afternoon, the Russell was flirting with the third-largest one-day decline of 2008, but forged a decent upside pop off the intraday low, leaving the Russell down 27.5% for the year. The Dow is off 29.8% for 2008, while the S&P 500 is down 32.0%.

Large-cap banks and financial institutions were the best performers today, boosted by news that the U.S. government will use $250 billion in taxpayer funds to purchase stock in select big banks. That news catapulted the market higher on the open, but within 30 minutes the opening gains in small caps had been given back as investors started to fret about the longer-term picture for the economy. In addition, hot money traders who caught part of the big bounce off the lows started to book profits, which helped stall upside momentum. Even with the sizable pullback in the overall market, the PHLX KBW Bank Index jumped 12%, while the Financial Select Sector SPDR Fund was up nearly 6%.

“Part of today’s sell-off looked to be the market taking protection against profit numbers. Samsung made cool comments on DRAM demand, which implies slowing PC sales and reduction in demand for technology,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview with SmallCapInvestor.com.

Kalivas said that the higher open today was a “kiss of death” that invited selling because the banking bailout might help in the big picture, but does not change immediate economic conditions. And while the international viewpoint is . . .

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