Small caps sink as financials gasping for air again

Small-cap stocks took a dive on the opening, unable to sustain the upward momentum off Thursday afternoon’s surge as financial stocks were getting clobbered. Sloppy August retail sales took a toll on the market, but financial stocks were under stress even before the economic data came out this morning. On the bright side, commodity stocks were keeping index products from really sinking. At 10:02 a.m. ET, the Russell 2000 (NYSE:IWM) was down 6.21, or 0.86%, at 712.78.

The big news so far this morning was that August retail sales came in below expectations, with the headline figure at minus 0.3% when traders were looking for a rise of 0.2%. In addition, the figures for July were revised downward, which added to the sloppy tone. The PPI report came out at the same time this morning as retail sales, and the inflation picture was a little brighter than forecast, but the PPI was overshadowed by retail sales. In addition, the “core” rate on PPI was in line with expectations at 0.2%, so the overall decline of 0.9% that topped the minus 0.5% forecast was dulled because clearly energy prices have been on the decline.

The Michigan sentiment survey came in with a big surprise this morning, which helped stabilize stocks. The figure was at 73.1 in September — the highest reading in eight months and well above the forecast of 64. Meanwhile, the business inventory report came in at 1.1%, which was above the forecast of 0.5%.

Financial shares were once again a sore spot for the index products, as the market fretted over the future of Lehman Brothers Holdings Inc. (NYSE:LEH), especially on talk this morning that the government isn’t that eager to step in and bail out the nation’s fourth largest investment bank. LEH shares were down 17% shortly after the open. Other “name” financial shares in the glare this morning included American International Group Inc. (NYSE:AIG), which was down 18% at the lowest prices in more than a decade.

Crude oil price action will also be a focal point today as the market braces for Hurricane Ike to make landfall. Shortly after the open, crude oil futures were up about $1 a barrel. Also, other commodity markets were in rally mode as . . .

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