Waiting for a Bear Market Bounce

07/07/2008 12:00 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, editor of VRTrader.com, says we're in a bear market, but stocks look very oversold and he expects a short-term rally soon.

Is this stock market and economy starting to get scary? I mean really, really scary? "The Dow Jones Industrial Average and Standard & Poor's 500 posted their worst one-month drop since September 2002. The Dow also suffered its worst first half since 1970." I keep seeing news items like this.

Now [last week we had]: "Bear market: It's now official." "Worst since 1970." "First time since the Great Depression." "Bear market." Is anything going right?

I am tempted to play the contrarian here and say everything will be fine. In fact, everything probably will be fine in the long run. But for now, this market is sick and the economy is weak and probably recessionary.

Negative news will likely continue plaguing the market over the following months as earnings come in weak, the economy weakens, oil stays high as Congress does nothing except for accuse speculators, and financial firms teeter on the brink of destruction. But in the short, short run of days, the market could easily stage rallies. In fact, we expect one [soon].

We have declined over 3,000 points in the Dow Jones Industrial Average since the October 11, 2007 record highs and 2,000 points since mid-May. Volume remains heavy to the downside, but we're quite oversold and "seasonality" factors favor a bounce, [although] 10,700-10,800 in the Dow Industrials is still a possibility--perhaps following a rebound.  This is the second time in recent history that the market has been unable to rally in a bullish period.

There is much discussion that we are near a bottom because of the negativity surrounding this market. If a bottom does come off of this sentiment, it will only be short term since everyone is expecting a rally off of this condition. If it happens, it won't last long. It is still too fashionable for the talking heads on CNBC and elsewhere to try and pick bottoms here. There is more pain to come. It is when everyone says "When will it end?" that a bear market bottom is near.

A bounce is overdue, however, and we will see how the trade goes when this bounce finally unfolds. The question is, from what level will the market bounce? We think the bulls will try to make a stand here, in the vicinity of the January and March lows. We have technical rebound numbers back to Dow Industrials 11,725 and 1,304 in the [S&P 500], but first buyers need to show that they can simply close the market on a positive note. One step at a time.

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