Commodities still the star of the show; limiting losses

Small-cap stocks remained in negative territory into midday trading even as the Dow zigzagged back and forth from lower to higher ground. Energy and commodity stocks were once again the dominant upside force for equities, countered by a weak tone in financial shares following a dour report on the jobs front this morning. At 12:20 p.m. ET, the Russell 2000 (NYSE:IWM) was down 2.01, or 0.42%, at 474.39.

Investors continue to debate over whether or not all these scary economic reports are already priced into the market, but it was hard to simply shrug off this morning’s weekly unemployment claims report, which showed that more people were filing for jobless benefits last week than we’ve seen in 26 years. Money clearly was flowing away from financial stocks this morning in favor of commodities, driven not only by the economic data, but also by a big decline in the U.S. dollar, which makes commodities priced in dollar terms more attractive and also bolsters exports for U.S.-based firms that ship goods overseas. The greenback was off more than 2% against the euro, sinking to the lowest point since Oct. 21.

The pullback in the buck was an obvious benefit to crude oil prices, which climbed back above $46 a barrel, up nearly $3 today. In addition to the currency support, crude oil prices were lifted by a report from the International Energy Agency predicting a recovery in demand in 2009 and a surprising drop in Saudi output in November. Energy stocks were up some 2.7% at mid-session, while financial shares were off about 2.2%.

The Hennessee Group Hedge Fund Index fell 2.69% in November, which was a big improvement from losses in the 6% range the previous two months, but still a poor performance historically. Hedge funds as a group haven’t made money on a monthly basis since May, which is an extreme drought for a group considered to house the most savvy traders on the planet. In addition, plunging hedge fund losses have sparked a tidal wave of redemptions, adding to the selling fire in stocks the last two months. With another poor performance for the month of November . . .

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