Bulls kicked the legs out of this week's bear run on stocks, and the "dip buyers" could keep coming in even though the selloff may not be over.
Stocks posted their best one-day gain in five weeks Wednesday. The Dow rallied 154 points Wednesday, after posting its worst two days of triple-digit losses since June Monday and Tuesday. The rallied 15 points to 1,998, and the Nasdaq gained a full percent to 4,555 in its best performance since mid-July.
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"The selloff earlier this week seemed a little out of place. We had a big run last week. We were pulling back and giving that back. There was a little negative Fed rhetoric," said Andrew Burkly, institutional portfolio strategist at Oppenheimer Asset Management.
There are more than a half dozen Fed speakers out this week, but there was also Fed "rhetoric" that helped stocks, including comments from Chicago Fed President Charles Evans Wednesday, who said if the dollar continues stronger, lower inflation could mean more Fed accommodation.
Talk of further easing by the European Central Bank spurred early buying, and there was also a lift from a sharp jump in new home sales, even though existing home sales were weak earlier this week.
Thursday's data includes weekly jobless claims and durable goods, both at 8:30 a.m. EDT. Atlanta Fed President Dennis Lockhart speaks at 1:30 p.m. on the economic outlook and monetary policy.
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Treasurys sold off Wednesday, as stocks rallied and the dollar moved higher. The government's $35 billion five-year note auction saw weaker than usual demand, even though the two-year auction went well Tuesday. Traders are now eyeing the $29 billion seven-year note auction Thursday.
The dollar index rose above 85 for the first time in more than four years Wednesday. Energy prices were an early weight on stocks, with Brent at a more than two-year low and WTI crude also weaker, but a turn higher in oil prices helped take the energy sector into the green later in the session.
"Bonds are getting smacked again, so you have an asset allocation trade and a lot of it's been going on since that last move through 1,985 (on the S&P 500)," said one trader. Another pointed to the rebound in health-care stocks, up 1.7 percent, after they declined earlier in the week amid fears that Treasury was cracking down on mergers that enable U.S. companies to benefit from moving their headquarters to foreign addresses where they pay less taxes.
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Traders also cited short-overing for firing up the rally. "At the end of the day, it's just continued momentum. It's once every two weeks, we lose a percent or two in the market place and people get scared. The VIX moves 10 percent to 15 percent in a day and they get scared…Today, they're not scared," said one trader.
MacNeil Curry, global head of technical strategy at Bank of America Merrill Lynch, said the S&P's 50- day moving average was an important pivot point—at 1,976. The S&P touched 1,978 and reversed course, all the way to a high of 1,999 intraday.
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Curry said that level could come into play again as a testing point for the market. "I thought we'd get down to the 50-day moving average. If we broke there, we'd see a push to (S&P) 1,940. It did get down to the 50-day, but I don't think it's been busted yet," he said.
Curry said the selloff in the first two days of the week did not have the look of a bottom because of the slope of the equity volatility curve. "I'm inclined to say this is more of a temporary bounce and risks are more to the downside," he said.
Curry said there are still negative seasonal factors that could affect the market. "We haven't seen conditions that are consistent with the end of a correction… Selling pressure did not even reach n the shorter term capitulation levels."
But Burkly expects any selloff to be short-lived, and he sees stocks doing better into the end of the year.
"Overall, I'm pretty optimistic for year-end and fourth quarter. I think as we get into earnings, things look pretty good. It seems to me earlier this week everyone was calling for a 10 percent correction, once we were down 1 percent, and once they did that we started turning on a dime," he said.
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Burkly said he believes health care was oversold and that led the bounce back. But he also said the market's gains are still being met with a lot of skepticism, and that's evident in the fund flows data.
ICI Wednesday reported that for the five weeks ended Sept. 17, taxable bond flows saw inflows of about $8.3 billion while domestic equity funds saw outflows of about $10 billion.
"There's a good deal of skepticism out there," he said. "It continues to be the kind of market that nobody likes…they keep looking for excuses," he said.