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Market Recovers When Russell 2000 Recovers


Small-cap index barometer of access to capital.

Dodging Bullets

The market almost did it, right? Of course, there was never a point in yesterday's session where I felt like breaking out the champagne. It was more like, "The market is up a couple hundred points. Isn't that cute?"

Then came the selling. The more equities decline in the last hour of trading, the more demoralized the handful of would-be buyers become; the more demoralized they become, the more steeply the market declines.

Still, I think these late rounds of selling are more about mutual fund redemptions - not about individual investors realizing they pulled the trigger too fast. Redemptions indicate hope lost forever - and that's slightly different from someone closing out positions to stem losses and live to fight another day.

Let's face it: This dog doesn't have a lot of bite to begin with, and hunting is completely out of the question. The 200 points lost in the waning moments of the session was a fait accompli - scarcely newsworthy. While the Dow has fought tooth and nail to hang above that 7880 intraday support point (established a couple of weeks ago), a few other indices have fallen through a trap-door.

One big-time loser is the Russell 2000, which outperformed large-cap indices for years. Yesterday, the index finished at a new low, and now looks extremely vulnerable. This reflects how hard it currently is for small-cap companies to access capital. While the Fed funnels money into banks' coffers, smaller names are forced to beg. If the Russell 2000 ever comes around, it would be an excellent sign that the coast is clear.

I don't see this happening anytime soon. In the meantime, the index could rebound - but only after getting through a wall of resistance that begins at 540 to 570. Support, you might ask? Don't.

Click to enlarge

TARP to the Rescue

The money came cascading down yesterday, ultimately hitting no fewer than 14 banks. These "healthy" banks received handouts from $3.55 billion to $186 million. The largesse helped the group move higher earlier in the session; but when all was said and done, only 3 -- Regions (RF) +11.3%, Huntington (HBAN) +14.63% and First Horizon (FHN) +10.58% -- enjoyed double-digit moves on the day.

Essentially, the government has ratcheted up its role of deciding who lives and who gets left to die in the wilderness. I'm not sure how all the new proposals will be paid for, but it's likely this TARP program will have to be elastic: The government may have to stretch it just a bit.

The auto industry will receive money, to be sure, and -- despite their denials -- I believe insurance companies will be on the receiving end of taxpayer-funded investments as well.

It's a brutal twist on the notion of survival of the fittest.

The Fed begins its 2-day meeting today. There's debate on whether the cut should be 50 basis points or 75 basis points. With employment about to surge (see the latest reading of mass layoffs), the Fed has to be firm and proactive and forget about leaving bullets in the gun.

I'm not sure if it's a saying from the Old West, but it should be: "Never die with bullets in your gun." In the meantime, there's also speculation as to whether or not we'll see a coordinated rate cut between all the key central banks.

It would be encouraging - but don't hold your breath.
No positions in stocks mentioned.
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