The market finally bounced yesterday from a very oversold short-term condition, turning what was a 33 point loss on the S&P 500 Index at its worst point into a very slight gain for the day. So far today, it seems to be continuing, with the S&P up again as I’m writing this. The big question, of course, is how long this can potentially continue. Is this just a brief respite before we get a 2008-like plunge, or will the bull market of the past year resume from here?
It’s probably too early to tell at this point, but there will be some key things we’ll be watching to help us make that determination. First of all, the decline of the past few weeks has taken the market below some significant technical levels, so how it behaves as it now approaches these levels from below will be important. Second, to the extent this bounce is able to extend all the way back towards the April highs, we’ll be watching market internals for any notable divergences. Back in 2007, for instance, the S&P fell 9% in July and August before rallying back and making its ultimate high in October. But, there were some glaring divergences in measures like the advance/decline line, which failed to make a new high, giving a big clue that an important market top was forming.
In addition to market technicals, obviously we also need to keep a close watch on economic fundamentals to see if the recovery is still intact. Seemingly lost in all the concerns about the European debt crisis, rising geopolitical tensions around the globe, the oil spill, etc. is that recent economic reports have been largely positive. Yesterday, consumer confidence rose more than expected, while today both durable goods orders and new home sales surpassed expectations. Of course, there are plenty of things to be worried about and the market clearly seems to be focusing on those lately, but if the economy can withstand all of the current concerns and continue making progress, then maybe this will turn out to be just a nasty correction in a bull market.