Just a Bear-Market Bounce?

10/12/2011 6:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Stocks briefly dropped into bear-market territory last week before rebounding sharply, and MoneyShow’s Jim Jubak discusses how far and how long he thinks this rally might last.

No sooner did the S&P break through its September and August lows in the first week of October, and people start talking about "Well, it’s officially a bear market, because we were down for a moment more than 20%, officially a bear market. We’re going to head down to the lows of 2010, that’s the next stop…"

No sooner had those words come out of people’s mouths, including mine, then we got a bounce. I’ve been telling you there’s likely to be a bounce, and I think that’s what we really got.

This market was really oversold—it had gone down too far too fast, and you had a tremendous amount of fear going on out there. Basically what we’re seeing is the kind of relief you get with, “Whoosh, that car didn’t hit me, and yes I did get run over by a bicycle, but it’s not really as bad as I thought it was going to be."

The bounce I think we’re looking at, it could run actually all the way through the end of the year. There is some possibility that we’ll go from a bounce, to earnings news, to good news from Europe, and that might drive us into November or December.

The problem is, if you look a little further out, it’s very hard if you look at 2012 to say the market should continue to go up from there. We’re going to return to the fears of yesteryear, when we look at the year of debt crisis…the Greek default…the US economy is not going to be doing that well…it may or may not slide into recession, but we’re not looking at a whole lot of growth.

We’ve got uncertainties about China, Brazil, India…all those things are going to return, and when the stock market gets high enough so that people are starting to say, "Well, you know, maybe I can take a little profit here, or maybe I’m worried about protecting my profit," then the bounce comes to an end, and we’ve got to switch back to all of this.

The statements that people said in early October about "Oh, we’re going to back to the lows of 2010," I think are still operative. That we’re still looking at possibly going back to that.

Now, it’s really important to note that the lows of August and September were like 1,120 on the S&P, and the lows of July 2010 were roughly 1,030—or 1,010 if you take the intraday—so we’re looking at another 100 points from here, which is about 10%.

It’s not an insignificant drop, it’s not the end of the world, and that would really be in all probability the bottom for this cycle, because we’re starting to get some good news coming out of the emerging markets, and that might actually start to drive stock prices there, and then here.

Right now, what’s really interesting for US investors is that the S&P is really the only index—the only one that I know of—major index in the world that hasn’t already gone down to the July 2010 low. If you look at China, if you look at Europe, if you look at Germany, all these commodities, they’re all at that low, testing it and bouncing off of them.

So really, if you want to say the chances are that the S&P will join them, I think the chances are pretty good, but I think probably not until we get a pretty decent bounce at the end of 2011.

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