After initially spiking out of the gate on the government’s plan to unfreeze credit markets by directly injecting capital in banks and guaranteeing loans between banks, the Russell 2000 has steadily descended into the red midday, as traders locked in profits from Monday’s goliath rally.

At 12:21 p.m. ET, the Russell 2000 (NYSE:IWM) was down 7.05, or 1.23%, at 563.66. The Russell continues to lag the Dow; however, the tech laden Nasdaq remains down double fold.

Building on Monday’s colossal gains, small caps opened higher following news that the U.S. will take Europe’s lead and directly inject capital into troubled banks, while also temporarily guaranteeing newly issued debt by banks. The government said it will also provide insurance for all non-interest-bearing accounts.

Also under the Treasury’s voluntary Capital Purchase Program, the government will purchase $250 billion in preferred shares of banks who elect to participate in the Treasury’s program by November 14. Thus far, nine major banks have said they will participate in the program. Commenting on the direct investment in financial entities, President Bush Tuesday said, the administration’s steps were “not intended to take over the free market but to preserve it.”

Financial firms remain in the green midday, with Morgan Stanley (NYSE:MS) up 20%, Citigroup Inc. (NYSE:C) up 17%, Bank of America Corp. (NYSE:BAC) up 14% and Goldman Sachs (NYSE:GS) up 13% leading the way.

“I would caution that the world is not going back to where it was before September,” Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an email. “The freeze has meant that the outlook for the economy has soured and we're still not sure by how much. Call it the Z factor. This means that no one can be sure the impact on companies’ sales or earnings. The market was assessing a very negative outcome by selling equities down as far as they did prior to the US/global actions.  Now, we have had a massive rally as the market anticipates brighter times ahead. Don't get too excited by the upmove. The Z factor will cap this rally as will the terrible economic numbers that will come out over the next 6 weeks.”  ...

For access to the full article, you must be a registered member - it's FREE.