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Russell 2000 Squeezes Higher in Relief Rally

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Today's financial recap and tomorrow's financial outlook.

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The bulls caught a break Wednesday following three straight down days that saw small caps take a big hit.

The S&P 500 (SPX) dropped to 1,978.63 in early trading, putting in line with the September 15 interim low that preceded the run to the record high at 2,019.26.

From the morning bottom, equities marched steadily higher into the close, with the S&P finishing at 1,998.30, up 0.78%.

The action could be considered a relief rally, as various technical indicators like the NYSE McClellan Oscillator signaled we were approaching oversold territory on Tuesday. Additionally, big two-day spikes in the VIX, such as that seen on Monday and Tuesday, tend to be followed by gains in stocks.

Positive economic data certainly helped the broader market mood.

August New Home Sales rose 504,000, well above the 430,000 consensus forecast. July's number was revised up to 427,000 from 412,000. .

Retail stocks were strong today, with the Market Vectors Retail ETF (RTH) fund up 1.67%. Its biggest component, Wal-Mart (WMT) rose 7.4% on its strong second-quarter results.

The iShares FTSE/Xinhua China 25 Index ETF (FXI) rallied 1.94% today. Sentiment towards Chinese equities has been improving on an easing of mortgage lending rules, and as traders anticipate the Shanghai-Hong Kong Stock Connect platform, which will give Hong Kong-based investors greater access to Chinese shares.

Russian stocks also performed well after the country completed its first government bond sale since July, a sign of stability.

However, most traders were fixated on the Russell 2000 (RUT), as its recent underperformance vs. the S&P 500 and Dow Jones Industrial Average (DJI) has represented a major divergence.

On Monday, the Russell's 50-day moving average crossed below the 200, forming a negative chart pattern called a Death Cross.

But traders focused on the Russell got a bit of reprieve today, as the index rose 0.86%, slightly better than the S&P. Greater outperformance would have been ideal for the bulls, but risky sectors like biotech and social media rose sharply today, showing that there is still some speculative hunger out there..

Despite the positive action in the major indices, Apple (AAPL) fell 0.9% after numerous media outlets reported that some iPhone 6 users are having issues with their phones bending. Additionally, in the afternoon, the company pulled its iPhone 8 software update off the market due to malfunctions.

Tomorrow's Financial Outlook

Jobless claims for last week will be reported at 8:30 a.m. ET, as will the August Durable Good report.

Both numbers could move the market, at least in the short-term.

From a bigger-picture perspective, traders will be watching to see if today's bounce was a one-hit wonder. Traders are still concerned that weakness in small caps and widening of credit spreads are the sign of a bigger and badder bear on the horizon

Twitter: @Minyanville

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No positions in stocks mentioned.

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