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Well, We Got That Oversold Bounce – Now What?

by Brett on September 1, 2010

Today, we got that bounce in stocks that we thought might be coming – from yesterday’s stock market wrap:

I’m not sure if I’d initiate a new S&P short position at this juncture – as the contrarian in me thinks we’ve got to see some sort of short-term pop soon.  Markets rarely cooperate with broader prevailing sentiment.

It’d have been a great call, had I actually covered my short position in anticipation of today’s bounce!

But that’s a little unfair – the broader trend is still down, or at worst, flat and rangebound.  Tough to say what the markets will do day to day.

So where are we now?  The notoriously weak month of September is fittingly off to a red hot start – up nearly 3% after just one trading day!  The rally was broad based, with 11 stocks up for every 1 down (continuing the theme of record high stock market correlation).  So is the bull back?

Probably not.  A big day like this was due, thanks to the prevailing pessimism in amongst investors.  There IS a bit of room for this rally to run – perhaps all the way to the upper-end of the range we’ve been trading in since June:

S&P 500 Trading Range June September 1 2010Source: StockCharts.com

If a bounce that high occurs, renewed investor optimism would give us bears a chance to load up on our shorts.  I’m not sure if we’ll get there, though.  While some might argue that a rally like today’s – with solid breadth – means the bulls are back in charge, I’d counter that we’ve seen many of the recent rallies terminate after impressive days like today.

So the follow through tomorrow, Friday, and after Labor Day should be interesting to watch.


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Read more on Oversold, S&P 500 (SPX) at Wikinvest

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