Thursday was yet another wild ride on Wall Street. While the intraday swings paled in comparison to Wednesday's insanity, there was still plenty of volatility to go around. With the algos clearly still in charge of the action, it is somewhat difficult to make heads or tails of it all. But let's give it a go anyway.

There were basically five key takeaways from the action:

1. The warnings from both Wal-Mart (NYSE: WMT) and eBay (NASDAQ: EBAY) regarding the outlook for the Holiday Shopping Season

2. There was no real Ebola news to speak of

3. Another "E" was in focus (as in QE)

4. The 2-minute, 19 point blast in the S&P 500

5. The outperformance of smallcaps

Let's take these one at a time. First there was the Reuters report on Wal-Mart and eBay. The article pointed out that both companies had cut their outlooks for the holiday shopping season and thus, the fourth quarter could quickly become a problem.

Speaking of the all-important shopping season, the National Retail Federation currently expects holiday sales to rise 4.1% to $616.9 billion, while Deloitte has forecasted a 4.5% gain.

The bottom line here is the news from WMT and EBAY was a bit of a surprise and caused trader to wonder whether they need to start rethinking the outlook for the economy in general and retail in particular.

No News is Good News

Next, while you may not have noticed, there wasn't a new case of Ebola reported in the U.S. yesterday. Frankly the Ebola situation is not really a primary driver of the market action. But, the algos do seem to do some selling every time a new report hits the wires. In addition, it was noted that none of the family of patient who died in Dallas have shown signs of the virus after 21 days. This is key because 21 days is considered the common incubation period for virus. Therefore, the mass outbreak theme seemed to settle down a bit.

+19 Points in 2 Minutes?

Although the volatility has been exceptionally high of late, you don't often see the S&P 500 move 19 points in just 2 minutes (and a total of 22 points -or +1.2% - in 4 minutes). And yet that is exactly what happened at 10:21 am eastern Thursday morning. While there are indeed a boatload of milliseconds in 2 minutes, the big blast smacked of somebody somewhere saying enough is enough, let's take this thing the other way for a while.

More QE?

Or perhaps more correctly, stocks popped after the algos got word that the usually hawkish St. Louis Fed President, James Bullard, surprised the market with a rather dovish remark. In short, Mr. Bullard said publicly that the Federal Reserve should consider putting the tapering of its QE program on hold for a bit due to the market selloff to see how the U.S. economic outlook evolves.

In an interview on Bloomberg TV, Bullard said that the Fed cannot accept the recent drop in inflation expectations seen in the Treasury Inflation Protected Securities. Remember, the Fed now wants to see inflation expectations increase, not decrease.

"We have to make sure inflation and inflation expectations remain near our target. And for that reason, a reasonable response of the Fed in this situation ... we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December," Bullard said.

Bullard added, "If the economy is still as robust as I am describing it, then I think we could just end the program in December. But if the market is right, and this is portending something more serious for the U.S. economy, then the committee would have an option of ramping up QE at that point."

The keys here are (a) Bullard has been fairly vocal in his call for rates to rise in March 2015, which is before the general consensus for a June lift-off, (b) Bullard was the second Fed official in a week to mention MORE QE and (c) the St. Louis Fed President's comments definitely took the market by surprise.

So, BAM, just like that, the morning rout was over and stocks were rebounding hard from deep losses - for the second day in a row.

Are Smallcaps Back?

Finally, the action in the smallcaps is worthy of note. For the second day in a row, the Russell 2000 outperformed its blue-chip brethren - by a mile. For example, while the S&P 500 did finish in the green (which admittedly is a bit better than the Dow's loss of 25 points), the Russell posted a gain of +1.27%. And over the past 3 days, the smallcap index sports a gain of +3.5% versus a loss of -0.64% for the S&P 500. Although it has been tough sledding in the Russell for quite a while now, this action is clearly encouraging.

iShares Russell 2000 (IWM) - Daily

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So, are smallcaps back? Is the correction, which totaled -13.2% as of Monday, now over? Is there finally value in them 'thar hills? Or are traders simply covering their short plays here?

Unfortunately, the damage to the smallcap index has been so significant that we won't be able to tell if the decline is over until the next bounce has run its course. We will note that the Russell remains in an intermediate-term downtrend and as such, would need to put in a "higher high" for the move to be taken seriously. This would require a close over 1180 on the index and $117.20 on the IWM. But first, there is important resistance to deal with just above current levels.

Time For That Bounce?

Getting back to the bigger picture, the action of the last two days would seem to indicate that the Fed is being fairly responsive in terms of trying to "talk" the market out of falling further. And given the buying that has come in during the intraday insanity seen in the last two days, it would appear that it is time for the bounce everyone is looking for.

The only question is whether or not the bounce will fall into the "dead cat" variety. Time will tell.

Turning To This Morning

While stocks struggled a bit in Asia, bourses in Europe and futures in the U.S. are charging higher so far in the early going. And although technicians will point to the fact that the indices managed to avoid breaking down further in the last two days, the bottom line today is that there is an awful lot of dovish central bank talk happening. On the back of Bullard's surprising remarks yesterday regarding putting the taper on hold and the possibility of "ramping QE back up again," both the ECB and Bank of England have gotten on board and said all the right things today. In addition, there was a front page story in China talking about system-wide monetary stimulus for the remainder of the year. And as you might suspect, this has been enough for traders to decide that it might be time to push prices in the other direction for a while. The key question of course, is if the early rally can hold.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: -1.39%
    Hong Kong: +0.53%
    Shanghai: -0.66%
    London: +0.82%
    Germany: +1.66%
    France: +1.82%
    Italy: +2.19%
    Spain: +2.24%

Crude Oil Futures: +$1.15 to $83.85

Gold: -$3.60 at $1237.60

Dollar: lower against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.177%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +20.05
    Dow Jones Industrial Average: +159
    NASDAQ Composite: +43.42

Thought For The Day:

It's not the load that breaks you down, it's the way you carry it. -Lou Holtz

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Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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