At some point, probably some point soon, stocks will bounce. There are still bulls out there and at some point some will step in and start buying stocks.
The question is: How much of a bounce can we expect?
Personally, while I think there will be a bounce I don’t expect it to be much. I think that sentiment is undergoing a shift towards the bearish camp and that higher prices will be met with selling.
For an idea of what we can expect, let’s look at the last three bounces (S&P 3 Month Chart).
From October 22 through October 31st the S&P managed about a 50 point move from around 1500 to around 1550 leading up to the Fed meeting on October 31st.
From November 27th through December 11th, the S&P managed a more impressive rally from lows around 1407 all the way up over 1520 – a move up of about 115 points – ahead of a hoped for 50 point rate cut by the Fed on December 11.
From December 18th through December 26th, the S&P put together a Santa Claus rally that took it from 1446 to 1498 – again about a 50 point move – before the assasination of Benazzir Bhutto on Thursday December 27th put an end to it.
What this suggests to me is that any bounce is likely to be capped at about 50 points on the S&P. That would retrace about half the move down over the last couple of weeks and put us up around 1440.
But I also wouldn’t be surprised to see a smaller bounce in the range of say 20-30 points before the selling resumes.
UPDATE (Wed 1/9, 8:30am PST): The Wall Street Journal’s stock market blog MarketBeat excerpted this post this morning.