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Will last week's worries continue to roil markets?

Our furry friends in the Bear camp tried their level best to play the worry card last week. And given the fact that the S&P 500 wound up with the first losing week of the year, I guess we will have to admit that they succeeded to some degree. However, given the “excuses” offered for the two-day dance to the downside and the quick rebound on Friday, I'm not entirely sure that the glass-is-half-empty gang will be able to convince investors that they should be quaking in their boots right now.

On Tuesday, stocks broke to new highs for the current bull market cycle. At the close, it appeared that despite the kicking and screaming by the nattering nabobs of negativity about the overbought condition and all the bad stuff still “out there,” a new leg of the uptrend was about to begin. But after being shut out of the game for just about every session of the year so far, the bears then proceeded to find a way to scare people on Wednesday. And before you could figure out which type of algo was being run, Tuesday's breakout had turned into a fake-out.

Although the majority of the damage done last week occurred in less than two hours (over Wednesday afternoon and Thursday morning), suddenly fear was in the air. Suddenly traders were no longer confident that the Fed would continue to support the economy. Suddenly there were worries about China. Suddenly traders cared about Europe again. And although the data has been pretty darn good of late, suddenly the U.S. housing market was a concern. Believe it or not; in just two short hours, the worry was back and the bears looked to be making a comeback.

The problem was that if one was objective in their view, the impetus for all the worry was a bit of a stretch. If you will recall, the sell programs started in earnest on Wednesday after the Fed minutes indicated that “many” FOMC members were concerned about the long-term impact of extended quantitative easing. While the argument that the Fed might pull the punch bowl from the QE party sooner than had been anticipated seemed to make sense on Wednesday, by Friday morning the idea seemed almost silly.

Remember that Ben Bernanke's Fed emphasizes transparency. Thus, if Gentle Ben was contemplating any kind of change, we'd likely hear about it first. In addition, the minutes indicated that (a) there didn't appear to be any discussion about the potential timeframe for the tapering or outright ending of asset purchases, (b) there was no strategy for said tapering discussed, and (c) there was a rather vigorous defense of the QE programs by the more dovish members of the FOMC (which likely included Chairman Bernanke and Vice Chair Janet Yellen).

Then on Thursday, six of the seven economic reports in the U.S. and the only report in Europe that really mattered, were all weaker than expected. In short, after this batch of data, the idea that the Fed would stop supporting the economy any time soon didn't have a lot of support.

And finally on Friday, St. Louis Fed President James Bullard told CNBC that the FOMC was likely to keep rates low for a “very long time.” So, the folks screaming that the sky really is going to fall sometime soon because of the Fed really didn't have a leg to stand on. As such, stocks rallied Friday, with the Dow and S&P both erasing Thursday's entire decline – and then some.

Dave Moenning

David Moenning is Chief Investment Officer at Heritage Capital Management, a Chicago-based registered investment advisory firm. Mr. Moenning began his investment career in 1980 and formed Heritage Capital in 1989. Dave’s firm focuses on “active management” and focuses on managing market risk on a daily basis. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Mr. Moenning is the 2013-14 President of NAAIM (National Association of Active Investment Managers) an organization dedicated to active management strategies. Follow Dave on Twitter at @StateDave.