Small caps tumble to fresh bear market lows despite housing surprise

Small-cap stocks extended the bear market collapse on Monday, setting fresh intraday and closing lows for the move as investor fear of risk amid a global meltdown took a toll on smaller companies. A positive surprise on new home sales helped take some of the edge off the bearish tone, but it wasn’t enough to douse a late flash of selling fire in the small-cap universe. The Russell 2000 (NYSE:IWM) closed down 22.72, or 4.82%, at 448.40, the lowest daily close since August 2003.

Small caps continue to be punished relative to their large-cap brethren as the bear market incites a “bigger is better” mentality among the few speculators willing to take on equity risk at this stage of the economic cycle. The Russell 2000 is now down 41% for 2008, while the Dow is off 38% and the S&P 500 is down 42%. Just a few weeks ago, the percentage spread favored the Russell over the Dow by more than 10 percentage points, but when the market went into collapse mode small caps suffered on a perception that they represent even riskier fare than big corporations.

Along that line of thought, it makes sense that when the market does find a bottom, it will probably take place first in the large-cap universe, then small caps will likely once again start to outperform on the way back up, just like they did once the market pulled out of the 2000 through 2001 economic recession. From a chart perspective, there are still no signs of a bottom in the Russell 2000, but it’s worth noting that even though small caps are at new move lows, the Dow and S&P 500 are still above the Oct. 10 trough (although the late collapse Monday put the S&P 500 on the doorstep of that low). There is also a powerful seasonal for major lows to be set in the month of October, and there are theories sprouting that once the month-end redemptions play out this final week of the month that bargain-hunters will be prominent . . .

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