Small caps notch five-year closing low; financials slump

Small-cap stocks remained in a tailspin Thursday, pulled down by sloppy earnings, recession fears, persistent talk of rampant redemptions and sinking financial shares. The Russell 2000 (NYSE:IWM) closed down 12.05, or 2.40%, at 489.92, which marked the lowest daily close since September 2003. Small-cap stocks were especially punished today relative to the broad market and for the first time in months the Dow officially replaced the Russell 2000 as a better performing index for 2008. The Russell is down 36% for the year, while the Dow is off 34% and the S&P 500 is down 38%. As investors flee equities for cash, their appetite for riskier small-cap fare has fallen off the table amid a mentality that only the biggest and strongest firms are in a position to weather this downturn.

Now that we’ve got all the gloom out of the way, it should be noted that the market staged an impressive recovery move off the lows late in the session. The Dow actually rallied 2% today, and even though the Russell was down more than 2%, it was still more than 4% above the intraday low. More importantly, the strong rally off that intraday low left a potential double bottom on daily charts with the Oct. 10 bear market trough. If the market rallies away from this quickly, then it would provide an important successful test of the lows and would be one of the better bottoming signals we’ve seen on the charts.

Now, back to the sour news from today: American International Group (NYSE:AIG) CEO Edward Liddy said that the $112.8 billion bailout by the government “may not be enough” and the firm may need to tap into additional capital, which sent a collective groan through the financial markets.

The big negative elements in play today were the AIG comments, more talk of forced liquidation amid heavy redemptions, particularly in the leveraged loan market, Nick Kalivas, vice president of financial research with MF Global, said in an email interview. Kalivas also noted that commercial paper market was “plugged” and that earnings are lackluster as companies admit business isn’t going to get better any . . .

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