NEW YORK (TheStreet) -- After moving off session lows, U.S. stock markets continued trading in the red late Monday afternoon.
Investors were struggling for direction as the quarter closes out, heading into October with its numerous uncertainties. The third-quarter earnings season ramps up in mid-October and the Federal Reserve's monthly asset buying program is expected to end officially next month.
The divergence between the Russell 2000
The Dow Jones Industrial Average
Watch the video below for a closer look at how U.S. markets are doing in midday trading Monday:
"The bigger concern from where we sit is ... what will happen when QE3 ends," said Adam Sarhan, CEO of Sarhan Capital. The S&P 500 has soared when QE has been in effect and fell 17% when QE1 ended and dropped 22% when QE2 ended. "It will be very interesting to see how the market reacts when QE3 officially ends next month," said Sarhan.
The strengthening dollar, meanwhile, continues to fuel concerns about the performance of multinational corporations during the third quarter.
The U.S. dollar index was slightly lower on Monday, but remained on pace to book its best quarterly performance since the third quarter of 2008 -- at the height of the financial crisis -- according to DailyFX's chief currency strategist John Kicklighter. Kicklighter said in a research note that monetary policy contrast is currently working in the dollar's favor. While the timing and pace for the Federal Open Market Committee's return to rate hikes is up for debate, even a period of basing would outweigh the active growth in accommodation by the Federal Reserve's three largest counterparts: the European Central Bank, the Bank of Japan, and the People's Bank of China, he said.
U.S. large caps are now down barely 2% from their peak, while small-cap stocks have never managed to eclipse their February top and are now down roughly 8% from their summer highs, according to BlackRock's global chief investment strategist Russ Koesterich. While this has led to concerns that small caps are leading large caps to the downside, Koesterich indicates that the divergence is actually represents a rotation opportunity to focus on bargains.
"One of the reasons small-cap names have been struggling is that their valuations are considerably more stretched than those of their large-cap cousins," he explained. Based on current earnings, U.S. small-cap stocks trade at around a 60% premium to large caps. That large premium -- the result of multi-year momentum-driven gains -- it was appears to be hurting the sector, he said.
In company news Monday, Pacific Investment Management Co., or Pimco, suffered roughly $10 billion of withdrawals following the departure on Friday of co-founder Bill Gross, a person familiar with the matter told The Wall Street Journal.
Einstein Noah Restaurant (BAGL) surged 50.56% after the David Einhorn-backed bagel chain agreed to be bought by JAB Holding Co. for $374 million.
American Apparel (APP) rose 3.21% after announcing the appointment of turnaround specialist Scott Brubaker as interim CEO and Hassan Natha, former Fisher Communications finance chief, as chief financial officer.
Tibco Software (TIBX) jumped more than 21% after revealing that it is selling itself to Vista Equity Partners for $4.3 billion.
SoftBank is in talks to buy or otherwise link up with DreamWorks Animation (DWA) , people familiar with the negotiations told the Journal. DreamWorks soared more than 26%.
Apple (AAPL) will be accused of prospering from illegal tax deals with the Irish government for more than two decades when the European Commission this week unveils details of a probe that could leave Apple with a record fine of as much as several billions of euros, the Financial Times reported. Apple lost 0.63%.
"The bad news [out of Hong Kong] this a.m. was not really disastrous," said Jonathan Corpina, senior managing partner at Meridian Equity Partners. "Overnight headlines took a little time for the markets to digest. So at first things looked abysmal, but settled down after the first hour of trading."
-- By Andrea Tse in New York