Trading Desk: Don’t Mistake This Bounce For A Bull Run Yet

Today was a nice reminder of what Wall Street can do when stocks get pushed too far down for the bulls to resist buying the dip. But we know now just how much exuberance the Fed can tolerate before they talk us back down the cliff.

The last time the market got this kind of bounce was back in June, when all major indices had been pushed into the bear market zone and technically oversold territory.

That last part is the most important. A lot of people like to throw the word “oversold” around to describe any stock that in their opinion has dropped farther than it should, but it really relates to statistics. It’s more about math than opinion.

An oversold stock has dropped so far that it strains the limits of statistical normality. If you weighed the last three weeks (give or take a day) against the rest of history, the recent deterioration has been on the extremely bearish end of the spectrum.

Sometimes that deterioration is warranted. But even when it is, Wall Street generally recoils from extreme positions one way or the other. We all get a sense that too much gain or too much loss in a short period of time is unreal.

And when there’s been too much loss, that recoil means a bounce. I think that’s where we are now. Maybe the Dow jumps another 7-8% in the next few weeks. If it can do more, we might be looking at a real rally.

Until then, though, this is a good trade but not the kind of dip you absolutely must buy.