Huge Russell rally as calm is restored in financials

Small-cap stocks took flight Wednesday, as investors embraced a spate of relatively positive earnings results and another slide in crude oil as a sign that the market may have weathered the worst of the summer storm. The Russell 2000 (NYSE:IWM) jumped 24.39, or 3.68%, to 686.75, notching the fourth-largest one-day advance of the year, powered by gains in financial and tech stocks.

The impressive rally topped off a picture perfect validation of a bullish chart pattern from Tuesday’s recovery bounce off fresh move lows, and further upside action this week would cement the most powerful technical analysis bullish signal in months. In addition, the heightened volatility in recent days fits with similar whipsaw price action at the lows back in January and March.

The market was also able to carve out today’s sizable gains despite another serving of bearish economic headlines. When the market starts to work higher in the face of bearish news, it is considered a classic show of strength — especially if the move is powered by more than just short-covering amid oversold conditions. While we wait for further confirmation of the recovery off Tuesday’s lows, let’s recap what the market overcame on the data front today.

The big report this morning was the Consumer Price Index release. For the second consecutive day, the market was slapped in the face with sobering inflation news. The headline figure for CPI came in at plus 1.1%, which was the largest monthly advance in 26 years. What’s more, the year-over-year increase was at a whopping 5%, which is the largest rise in consumer prices since 1991. In short, the CPI news was every bit as troubling as Tuesday’s Producer Price Index report, where the year-over-year figure was the highest since June 1981. And the inflation data simply adds to the woes from slumping housing, GDP and labor market reports of recent months.

So, if we are truly mired in a slow growth, rising unemployment, escalating inflation world, then why on earth did small caps put together such an impressive rally today? The easy part of that question is that crude oil prices tumbled down to . . .

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