Well, that was interesting! The market cynic in me says that yesterday's wild ride is fairly easy to explain... What the algos take away, the algos can give back - at any time - and vice versa.

While I have little doubt that the vast majority of the intraday action these days is being driven by high speed trading algorithms that make trend-following "decisions" at the speed of light, it is important to remember that those algos usually require some sort of a reason to trigger a move of 740 Dow points in a single session. I know, I know; 700 points ain't what it used to be. But the key here is yesterday's session started on a dour note and finished with a very nice rebound. So, there must be more to the story than just algos gone wild (again), right?

Although no one ever knows for sure why Ms. Market does what she does, I'm pretty sure I've got a handle on why the Dow went from down 510 to up 231. Or perhaps more importantly, why the Dow moved up nearly 400 points in a relatively straight line from about 1:30pm into the close.

The technicians will tell you that the Dow and S&P held on through yet another round of "testing" of their respective 200-day moving averages. That the NASDAQ first sank below and then blasted back above its 150-day. And that the Russell 2000, after putting in a higher low, started to take out recent technical levels. And all of the above leads to more buying.

I have little doubt that the algos took note of those technical levels and that most wound up piling on during the afternoon's break for the border. But again, there is usually a reason behind such moves.

From my seat, I believe we have none other than Larry Kudlow, the President's new chief economic advisor, to thank for all the fun.

First, Mr. Kudlow told reporters yesterday that what we're witnessing is all part of the President's negotiations. "He [the President] wants to solve this with the least amount of pain.... this is a growth action. I can't emphasize that enough," Kudlow said.

Then there was the Fox Business interview, which is well worth watching in its entirety. During the interview, Mr. Kudlow was asked at the outset if we are in a trade war with China. Kudlow responded with, "There's no trade war here... there are already back channel talks going on."

Kudlow reminded us that we are in the early stages of negotiations and that what we're seeing now is merely the "first proposals" being put out for comment. "Nothing concrete will happen for several months...None of the tariffs have been put in place yet."

Kudlow also said there is a process to go through with the WTO and that the White House is in the process of developing a "coalition of the willing" to confront China over their unfair and "illegal trade practices."

As for the markets, Kudlow said he understands the anxiety on Wall Street. But his message was clear, "Don't overreact." We're in the early phase of the game, Kudlow suggested.

However, the main message that Mr. Kudlow appeared to want to get across is that this is a growth opportunity for the U.S. And that by calling China on its the practices, the we will wind up with stronger trade and improved economic growth. So, we don't really have to "win" the trade war to get a "win" for the economy. We just have to see some improvement. Hmmm... I think I like the sound of that.

In my humble opinion, this was all the computers in Mahwah, New Jersey needed to hear. Once these comments were picked up, it was "everybody into the pool" for the rest of day.

The question at this point is, of course, will yesterday's exuberance last? To be sure, I don't know. I can say that, like most of the recent rallies, there wasn't the type of "oomph" seen yesterday that is needed to trigger an all-clear signal. For example, volume of the Dow was well below Monday's, when the market got smacked upside the head.

So until/unless traders and investors alike can become convinced that an economy-damaging trade war is off the table, we can probably expect Wall Street's wild ride to continue.

Thought For The Day:

If you want to live, give up your foolishness and let understanding guide your steps. -Proverbs 9:6

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

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

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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

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The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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