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State of the Markets: Yet another dip-buying opportunity, right?

The volatility continued on Thursday as investors were treated to a yet another in what has been a string of wild rides. For example, the futures had pointed to a modest rebound at the open of trade on Wall Street yesterday. However, within an hour, the Dow was down triple digits, the S&P was breaking down badly and it looked like the full-fledged correction that everyone has been talking about/waiting for was on.

However, as the saying goes, all’s well that ends well because the early fear was met with a rebound that produced what appears to be yet another “V” bottom. And by the time the closing bell rang, all the major indices, save the Dow, had managed to move back into the green. Heck, even the much maligned Russell 2000 managed to put up a nice gain on the day.

So, for those of that are obsessed with why things happen the way they do on Wall Street, there are two basic questions that need to be asked. First, why did stocks dive yet again in the early going? And second, what was that rebound all about?

Why the Dive?

In case you haven’t noticed, the pre-market futures session has often had very little meaning lately with regard to how the day plays out after the opening bell rings. And Thursday’s action was no different.

Prior to the open, futures had projected a modest rebound in the stock market. And for a few minutes anyway, that rebound played out yesterday. However, within 15 minutes, the indices started to sag. And by 10:30 am eastern, the S&P 500 was in another full-fledged retreat.

The question, of course, was why were stocks falling AGAIN? Was a bear market upon us? Was there a development in the Ebola situation? Had Russia decided to annex even more land? Had the Hong Kong protests turned violent?

No, the real reason for the sudden and swift decline was that Mario Draghi had started talking. Well, to be honest, “Super Mario” actually began what amounted to a borderline rant about the state of the European economy. And the bottom line is that head of the ECB was not upbeat.

Draghi Sends Wakeup Call

Mr. Draghi basically sent a wakeup call to the Eurozone’s leadership. He said in no uncertain terms that the EU economy was “weak and fragile.” Recall that the recent data from across the pond has indeed been much weaker than anticipated.

Then Draghi did something folks didn’t expect; he basically said that the ECB had done enough and that it was time for governments to step up.

The ECB President’s exact words were, “We’ve done a lot already, so let’s see…” To market analysts, this meant that Draghi was letting everyone know that there wasn’t anything else coming from the central bank of Europe. No real QE. No more rate cuts. Nothing.

Draghi was also quite evasive as to the specifics of the ECB’s current “private QE” program. There was no delineation about the size of the program or duration targets. To many, this suggested that the ECB board was NOT unanimously on board with the current plan.

Draghi said that EU leaders have to do more to reform their economies and to stimulate growth and revenues.

The result was a big dive in European banks, European stocks, and in turn, the U.S. stock market.

Before long, the major U.S. stock market indices were “whooshing” lower and that crackling sound heard in the background was the S&P 500 breaking its 150-day moving average.

But just about the time one may have considered all to be lost and that it might be time to head for the hills, stocks turned on a dime and rallied.

Why the Vigorous Rebound?

For the better part of the last two years, all declines have been met with “dip buying.” While one never knows exactly when or why the buyers emerge, they always have. Each and every crisis has been met with an enthusiastic rebound. And after a couple days of “bouncing” off the lows, the pullback is forgotten and traders start talking about new all-time highs again.

But this time “felt” different. There was the rise in the dollar, which to many is a game changer. There was the fact that rates may really be rising this time. There was the fact the China is slowing. And there was the really weak data that has been coming out of Europe. No, this time if felt like things really could be different.

But before you could decide whether to put some hedges on or to simply cut and run, the market rebounded. Before you could figure out which of the stocks on your shopping list you were going to “buy the dip” with, stocks were romping higher.

While there were no obvious catalysts to the sudden rebound, there were two things that seemed to prompt the algos to go the other way for a while.

S&P 500 – Daily

First, there was word that the leaders of the student protesters would be allowed to meet with HK officials, specifically the leader they wanted removed. While not a reason to buy stocks per se, it did appear to be enough to cause a couple buy programs to be run.

Next, there was the technical action. For some reason, the 150- and 200-day moving averages attract a LOT of attention. And this time was no different. The bounce had taken the S&P 500 back above its 150-day – and as such, the thinking was that the initial “test” of the level had been successful.

While it sounds a little ridiculous, this is the way the game is played for high speed traders. If a technical level is violated in either direction, you run programs accordingly. And with the S&P now back above the key moving average, the algos were buying.

Then the shorts started to cover. Then the dip-buyers started to do their thing. And before long, that big, scary decline had been completely reversed. Suddenly, people were breathing easier again. Suddenly, the fear had subsided. And suddenly it looked like the “meaningful” decline that everyone fears these days was once again, NOT happening.

On that last point, please understand that a bounce is part of the script during market declines. As such, the jury is really still out on whether or not the “V” bottom is in. Therefore, we will continue to watch the action closely and will let price continue to be our guide for a while longer.

– See more at: StateoftheMarkets.com

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.

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.