Counter-trend bounces in a bear market produce bigger moves than tend to occur in bull markets. This is simply because market players are not well prepared for them and don't trust them to last.
The longer they last, the more they suck in some folks that are worried about missing out on a major turn and the more short-squeeze action they produce. However, as we have seen recently, these big bounces can end very abruptly.
We had a classic bounce Monday, with the S&P 500 gaining 2.5% on breadth of about 6,900 gainers to 1,400 decliners. Most notable about the action is that breadth was extremely strong and even stronger in indexes such as the Nasdaq 1000 because people are buying indexes rather than individual stocks. Despite the robust index strength, there were over 600 stocks hitting new 12-month lows while only 50 were hitting 12-month highs.
As I've been discussing, bear market moves tend to be driven from the top down, and stock-picking is secondary. People are adding "risk" through indexes and not individual stocks.
The question now is whether this move has legs. Last Wednesday, we had a similar move, and it was totally reversed the next day. Conditions aren't quite the same this time, though, and there is a better chance that things may not fall apart as quickly. Still, there really is no way to know how much more momentum can be generated. There is a gap on the S&P 500 at 3727, which is natural resistance at this point, but if and when it is filled, I expect the bears to be very aggressive again.
The important thing right now is to stay strategic and not be sucked into hyperventilation about a market bottom. While the move in the indexes was quite sizable, if you look at the charts of individual stocks, they are not impressive. A big one-day bounce doesn't do much to improve a broken chart that has been downtrending for weeks.
The action Monday was a pretty routine bear market bounce, and there will be plenty of people that want to believe that it is a notable change in market character. It is possible that this is a turning point, but that is unlikely. We will have to wait and see what develops next.
Have a good evening. I'll see you Tuesday.