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Small-cap stocks pushed higher Wednesday, overcoming a glut of gloomy economic reports as investors snapped up bargains on homebuilder, financial and retailer shares. The Russell 2000 (NYSE:IWM) closed up 11.93, or 2.70%, at 453.76. Small caps outperformed the Dow for the day, but still lag the big-cap index for 2008, with the Russell off 41% for the year, while the Dow is down 35%. The S&P 500 is off 41%.

The fact that small caps finished off the day with a positive print is a minor victory for a downtrodden market. Early on today investors were greeted with a larger-than-expected decline on payroll jobs from the ADP Employment Survey and then hit with an unnerving drop in services sector activity in the ISM Non-Manufacturing Survey. The weak economic reports took a toll on prices early, as some traders fretted about Friday’s upcoming employment release.

However, the market rallied into midday trading as a rush for homebuilder stocks paced the comeback move. It should be noted as well that not all of today’s economic numbers were downbeat. In fact, the weekly MBA Mortgage Application index jumped 112% to the highest level since mid-February, sparking some hope that sinking mortgage rates will generate fresh activity in the housing arena.

“The mortgage purchase and refinance data are seen as friendly, and Radian said that October mortgage claims were less than expected,” Nick Kalivas, vice president of financial research with MF Global, said in an email interview. “The idea of cheap gasoline and the potential for refinance activity is helping to stoke interest in homebuilders and retailers. Finally, we’re seeing signs of something that could spark a rally and defaults could ease if people can refinance and pay less for gasoline.”

Speaking of gasoline, crude oil prices slipped $0.17 a barrel to $46.79 and notched 3-1/2-year lows during the U.S. trading session despite a drop in inventory levels. Energy stocks were a drag on stocks for most of the day, and the . . .

Small-cap stocks slipped Tuesday, pulled down by struggling financial sector shares and a profit-taking mentality following sizable gains the previous two sessions. The Russell 2000 (NYSE:IWM) was off 6.12, or 0.82%, at 744.94, while the Dow was down 1.19% at 11,642.47 and the S&P 500 was down 1.21% at 1,289.59. For the year, the IWM is down 2.75%, the Dow off 12.22% and the S&P 500 down 12.19%.

Small caps made a huge move during Monday’s rally relative to large-cap shares, fueled somewhat by ideas that a sinking U.S. dollar would stand to benefit smaller, domestic companies more than large multinationals who depend on sales to foreign customers. But even on today’s pullback, small caps still outperformed the Dow and S&P 500, reflecting investor taste for riskier fare and also on thoughts that previous similar economic cycles have benefited small caps over large-cap shares. However, the Russell was trumped today by the Nasdaq 100, as tech stocks put together a solid performance.

Tech stocks — and most equity indices in general — were underpinned on dips by a slide in crude oil prices, which slipped below $113 dollars a barrel for the first time in three months and eventually settled U.S. trading right near the $113 line. Demand destruction remains a concern for the energy market, as the Energy Information Administration today reported the largest drop in U.S. demand in 26 years, which countered some bullish supply concerns tied to the Russia/Georgia conflict. Elsewhere on the commodity front, gold price tumbled 1.7%, but the Commodity Research Bureau Index of 19 commodity markets was only off about 0.3%.

A recent surge in the U.S. dollar has played a key role in the decline of energy and other commodity prices, but today the greenback was relatively calm, failing to get a charge out of a surprisingly strong international trade report early this morning. The trade deficit narrowed to 56.7 billion dollars, which was better than the forecast for a deficit of 61.5 billion. Normally that would be enough to trigger more volatile response from foreign exchange traders, but with the dollar already soaring 7.5% . . .

Small caps opened lower and continue to bleed midday as concerns about financials and the credit crisis resurfaced to the top of the docket for investors. 

At 1:00 p.m. ET, the Russell 2000 (NYSE:IWM) had slipped 4.68, or 0.68%, to 736.38, while the Dow skidded 61.41, or 0.52%, to 11,721.21.

After what seemed to be the beginnings of a strong rally, the small-cap index lost its steam as a myriad of lackluster news spewed out of Wall Street’s major investment houses reminding investors of the difficulties that continue to enrapture financials.

JP Morgan (NYSE:JPM) said in a regulatory filing Monday that trading conditions have “substantially deteriorated” and that it anticipates the global economy will remain anemic, that capital markets will remain under pressure and that it expects housing prices to continue to crumble. The bank said it squandered $1.5 billion after hedges of its mortgage-backed securities and loans. Shares skidded 7% midday.

UBS (NYSE:UBS) reported today that it took a $5.1 billion write-down and booked a fourth consecutive loss in the second quarter of $331 million, as the bank continues to grapple with decayed subprime mortgage securities. The bank also said it will split up its investment banking and wealth management divisions.

Goldman Sachs (NYSE:GS) is off 4.5% midday after Deutsche Bank lowered its rating on the investment bank to “hold” from “buy” and reduced its target price. Oppenheimer’s Meredith Whitney also slashed her earnings outlook for this year and next.

Small-cap stocks edged lower shortly after the opening, pulled down by weakness in the financial arena, a bounce in crude oil prices and long profit-taking following two sessions of huge gains. At 10:00 a.m. ET, the Russell 2000 (NYSE:IWM) was down 4.22, or 0.56%, at 746.84. The Dow was off 0.58%, while the S&P 500 was down 0.51%.

Financial stocks were back in the spotlight this morning, pulled down by a batch of fresh bearish news overnight and a spate of analyst downgrades in various big names. Morgan Stanley (NYSE:MS) and Wachovia Corp. (NYSE:WB) were pressured by the auction-rate security fiasco, as WB settled a probe on the issue and lowered Q2 numbers, while MS offered to reimburse investors. It’s a painful hit to the bottom line that the number one bank Citigroup Inc. (NYSE:C) already has faced. In addition, Oppenheimer analysts lowered the outlook for Goldman Sachs Group Inc. (NYSE:GS). Shortly after the open, MS was down 3.0%, WB off 4.5%, C down 1.2% and GS down 3.3%. The Financial Select SPDR was down 1.9%.

The market also frowned upon a sudden recovery bounce in crude oil prices, which saw the market on black gold move from three-month lows near $113 overnight back toward the $115 zone into the stock market opening. The rise in crude was tied to news that some production and transport in the Georgia region was going to be offline, even though Russian officials have ordered an end to the military conflict.

Elsewhere on the commodity inflation front, corn futures were called lower following USDA’s August production report, which forecast a larger crop than expected. However, softs markets were climbing this morning and the iPath GSCI Total Return commodities index was up about 0.3% in early trading. After huge declines in recent days, a consolidation move or bounce in commodities certainly wouldn’t . . .

Shares of Intersections Inc. (Nasdaq:INTX) got a bit of a jolt in pre-market trading after the provider of consumer and corporate identity risk management services posted robust second-quarter results. Revenues surged 44.7%, while earnings shot up 212%, as the firm saw an increase in subscribers and revenues.

Shares gained 10%, or $0.84, to $9.00 in pre-market trading. For detailed price information and news stories on Intersections, click INTX. 

Brad Evans is a portfolio manager of the Heartland Value Plus Fund and the Heartland Value Fund for Heartland Advisors. Evans is a Chartered Financial Analyst and has more than 11 years of investment industry experience. He initially joined Heartland in 1996 as an equity research associate and was later promoted to equity research analyst focusing on, among other sectors, energy and materials. Following a three-year term with High Rock Capital as a vice president and research analyst, he returned to Heartland in 2004 to assume his current position. Evans graduated from the University of Wisconsin – Madison with honors and a B.A. in International Relations, Russian and Political Science.

What qualities do you look for in a small-cap stock? Have your criterion changed given the current macro environment?

“We are extremely valuation disciplined and look for low P/E, low price-to-cash flow, low price-to-book, low price-to-sales, a low multiple of enterprise value-to-EBITDA, discounted cash flow analysis, private market equity value and peer group analysis.

“We like to find companies that are trading at depressed valuations relative to where they traded before in the past. We find assets that are undervalued relative to what buyers are willing to pay for comparable assets based on what we call private market equity value, which is what a strategic buyer would pay for a set of assets. We do an extensive amount of valuation work. We’re bottoms-up stock pickers here at Heartland, so a lot of what we do is bottoms up and then we marry it together with our top-down view of the world. 

“In this environment, you’ve got to be extremely religious in terms of your valuation work and make sure you are tracking a value company that has good growth opportunities. You need strong management teams and we’re focused on companies where insiders are buying stock, not selling it.”

What are your three favorite small-cap stocks with market caps of under $1 billion for the year and why?

“A company called Asset Acceptance (Nasdaq:AACC) is very timely here. Asset Acceptance is a $283 million buyer of charge off consumer receivables, primarily eligible credit card issuers. Asset Acceptance likes to buy bad debt. The underlying thesis is that part of this credit cycle will include delinquency trends . . .

Global Consumer Acquisition Corp (Nasdaq:GHC.U), National Coal Corp (Nasdaq:NCOC) and Pioneer Drilling Co (Nasdaq:PDC) are among the new 52-week highs in Thursday's trading among companies with market capitalizations under $1 billion.

Here are the new 52-week highs among small caps:

Provider of identity protection and credit management services Intersections Inc. (Nasdaq:INTX) said after Thursday’s close that fourth-quarter earnings surged 375% on account of increases in direct marketing enrollments to beat the consensus on Wall Street. Shares gained 13.2%, or $0.94, to $8.04 in pre-market trading.

For detailed price information and recent news stories about Intersections, click INTX.  

The Russell 2000 (NYSE: IWM) and the other major U.S. indices lost ground following news of Bush’s plan to invigorate the economy. At 1:33 p.m. ET, the small-cap index was down 4.92 points, or 0.72%, to 675.65. The Dow Jones Industrial Average (INDU) had declined 47.63 points, or 0.39%, to 12,111.58.

“To keep our economy growing and creating jobs, Congress and the administration need to work to enact an economic growth package as soon as possible,” President Bush said during a press conference this afternoon.

Calls for a policy response to help the U.S. economy avoid recession have been mounting recently as politicians on both sides of the aisle have been scrambling to develop a stimulus package.

Bush continued that the growth package must about 1% of gross domestic product and has to focus on “broad-based tax relief.”

The White House wants to give one-time income tax rebates to taxpayers and eliminate the 10% income tax bracket for one year. Democrats generally agree, but want the aid to be more targeted toward the poor and unemployed.