With earnings season winding down and the geopolitical situation relatively quiet, traders were forced to deal with Thursday morning's macroeconomic data. The data were uniformly weaker than expected and shares responded in kind, but only temporarily. Major averages ended well off their early lows, as, once again, a dip in stock prices was viewed by some as an opportunity to buy rather than an impetus to sell.

After trading as low as 8340.23 at about 10:30 a.m. EDT, the Dow Jones Industrial Average recovered steadily until the final hour of trading, closing down 0.3% to 8454.25. The S&P 500 traded as low as 902.83 before rebounding to close off 0.1% to 916.30. The Nasdaq Composite ended up 0.6% to 1472.56 vs. its intraday low of 1451.30.

By my own estimate, the lead paragraph of this story represents about the sixth time in the past three weeks I've used some variation of "buy the dip" to describe market action. It may not be original, or even good prose, but it aptly describes the current environment; hence, the repetition. I've also written repeatedly about how traders have largely overlooked poor macroeconomic data , which ultimately proved the case again Thursday.

The session also saw shares once again overcome weakness in the dollar, which tumbled again, taking the U.S. Dollar Index to a four-year low, below 97, a key technical support that had repeatedly held since October 2000. (In reaction, gold futures rose 0.9% to $342.10 per ounce.)

The dollar reacted to the day's economic data, including the April Institute for Supply Management's purchasing managers' survey, which unexpectedly fell to 45.4 vs. expectations for a slight increase to 47. A reading below 50 indicates contraction in the manufacturing sector, which was the case for the second straight month.

Additionally, initial jobless claims rose to 448,000, bringing the four-week moving average to 442,000, its highest level since April 2002. Construction spending for March also fell, by 1% vs. expectations for a rise of 0.2%. Finally, preliminary indications of first-quarter productivity rose 1.6%, less than the projected 2% jump. (The price of the 10-year Treasury rose 2/32 to 100 9/32, its yield dipping to 3.83%.)

"The ISM was surely the tipping point for Thursday's action" in the dollar, according to Ashraf Laidi, chief currency strategist at MG Financial Group, who noted the dollar "briefly consolidated" before the 10 a.m. EDT release of the ISM data, "before sustaining renewed punishment."

The data, along with recent negative trends , "are conspiring to mount this dismal showing in the currency," Laidi said. Foreign exchange traders have "little hope" for any improvement Friday, he added, given that the unemployment rate is expected to rise to 5.9%, according to consensus estimates. (Notably, those estimates are from the same folks who got all of Thursday's data wrong, and on whose forecasts Alan Greenspan is basing his optimism for a second-half recovery.)

If the morning weakness was readily explained by the data, the afternoon comeback effort was a bit more complicated.

In addition to the aforementioned "buy the dip" mentality, some media sources attributed the rebound to positive earnings news from firms such as ExxonMobil ( XOM), Safeway ( SWY) and USA Interactive ( USAI). Others cited short-lived and ultimately erroneous rumors of the capture of Osama bin Laden.

Equally important, if not more so, was the outage at Globex, the Chicago Mercantile Exchange's electronic trading platform.

Globex is where so-called E-mini futures contracts on the S&P 500, Nasdaq 100 and Russell 2000 trade. Because the E-minis trade at a fraction of the value of their pit-traded counterparts (one-fifth the notional value in the case of the S&P 500) and are electronically traded, they have become very popular with smaller institutions and retail traders.

Big Trouble with E-minis

At approximately 11:40 a.m. EDT, Globex trading was halted due to problems with Internet switching technology. After initially promising trading would resume at 3:15 p.m. EDT, the Merc determined around that time that Globex trading would not reopen during Thursday's regular session, which usually ends at 4:15 p.m. EDT.

Traders who reportedly started short positions (or added to existing ones) after the ISM data release were caught off-guard when Globex trading went down.

"I suspect they screwed a lot of people who were short and couldn't afford" the pit-traded contracts, said Fari Hamzei, president of Hamzei Analytics. "Many institutions trade E-minis mainly for hedging purposes. Take that tool away and you can't hedge. And institutions don't go out bare naked."

The implication being that anyone "trapped" in their E-mini short would look to hedge that position by going long, either in the cash market or, more likely, the S&P Depositary Receipts ( SPY), aka Spyders, or Nasdaq 100 Unit Trust ( QQQ). Such buying would have aided the market's recovery from the morning lows.

Trading volume in the QQQs was up 1% at 65.7 million from Wednesday, according to Amex, although volume in the Spyders was down fractionally at just under 50 million.

Hamzei was net short but "mainly flat" when the Globex outage occurred ("luckily" by his own admission), but others weren't so fortunate.

"There are a whole lot of traders that got short E-minis this morning and are trapped since Globex is out," emailed one market participant. "I think a lot of the recovery today is due to the shorts not being able to press via their normal means after this morning's breakdown and then being trapped by the reversal and having to cover with other, unfamiliar vehicles."

The source, a longtime reader who requested anonymity, added: "Of course, you have the smart guys who have figured this out and are jamming the shorts for all their worth."

Certainly, it's unknowable how much effect all this really had on Thursday's trading. But for traders, the significance of the Globex outage should not be underestimated.

Because of their lower cost and electronic advantage (better execution, time-stamped trades, etc.), the E-mini futures have become incredibly popular. In 2002, there were 115.7 million E-mini S&P futures contracts traded vs. 23.7 million pit-traded contracts, according to a Merc spokeswoman. The volume discrepancy widened to more than 7 to 1 in the first quarter, she said.

The volume spread between E-mini Nasdaq 100 contracts and their pit counterparts was more than 11 to 1 last year, and the spread widened to nearly 15 to 1 in the first quarter.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task

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