Small Caps Shrug Off Bad Day: Leading Other Indexes

Despite opening lower this morning, small caps have shrugged off bad unemployment data and are trading higher this afternoon.

At 2:36 pm ET, the Russell 2000 (NYSE:IWM) is up 2.78% at 484.96, while the Dow is up 0.92% and the S&P 500 is up 1.42%.

Although stocks are higher today, they are still down sharply for the week, no thanks to new data out. Today the Labor Department reported that more workers filed last week for benefits than anticipated. New claims jumped to 637,000, much more than what was forecasted. The overall number of people seeking unemployment benefits grew faster than expected, increasing to 6.6 million, while continuing claims hit a 15th straight weekly record.

Small caps on the rise today include Gildan Activewear Inc. (NYSE:GIL), up 21% after announcing second-quarter results, and Forest City Enterprises (NYSE:FCY), up 18% after guiding in line.

*****The selling got serious yesterday. But once again, as TradeMaster technical analyst Jason Cimpl forecast, the dip was a buying opportunity. Stocks are up this morning as if nothing happened…

But of course, something did happen. Cracks in the rally are beginning to show. And economic data is starting to weaken. Consider this morning’s Producer Price Index (PPI). This popular measure of inflation on the wholesale level came in stronger than expected. Prices for food are ticking upward.

No doubt the Fed is relieved to see a little strength in prices, as overall, prices have dropped 3.7% over the last 12 months. The only thing that scares the Fed more than inflation is deflation.

My question is: at what point do rising prices motivate the Fed to start sopping up the flood of liquidity it has released over the last eight months? Clearly, there will have to be stronger signs of recovery, but with the potential for full employment numbers to be higher than they’ve historically been, I can’t help but be . . .

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