Weak commodities, cautious earnings, techs weigh down small caps

Small-cap stocks closed lower, pulled down by slumping commodity markets, a cautious tone amid peak earnings season and lagging performance in the tech sector. The Russell 2000 (NYSE:IWM) closed down 16.18, or 2.96%, at 530.65 and is now down 31% for the year. For the first time in many months, the Dow has actually pulled virtually even with the Russell for 2008, while the S&P 500 is off 35%. Just a few weeks ago, the annual performance spread between the Russell and Dow was in double digits on a percentage basis, so the recent collapse in the spread between small- and large-caps reflects an even more aggressive flight out of “riskier” small-cap fare from investors.

If Monday’s big rally was primarily about energy, then today’s slide had a few more tentacles in play, but the main theme in motion was about the economy and whether or not global slowing would continue to get in the way of the stock market.

From a global standpoint, a recession in the United States and a sharp downturn around the world will hurt demand for commodity goods, a theme that played out today … not just in the U.S. market, but around the globe. Perhaps the perfect poster child for that theme today was the copper market, which crumbled to the lowest point since December 2005 and is now off 50% from the spring highs. A big part of that pullback is linked to China, where GDP slipped below double digits this week for the first time in five years. And the whole bearish commodities story surely got an extra kick from a big rally in the U.S. dollar, which makes commodities priced in dollar terms more expensive — and therefore crimps demand for those products. The greenback soared more than 200 basis points, or some 2% against the euro, making not just new highs for the move but also charging to the highest point since February 2007. With the dollar on a rampage and commodities limping on demand fears, crude oil’s rally from Monday was short-lived. Crude oil futures plunged some 4% and quickly . . .

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