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Stock Market Could Bounce, but Look Out Below

Some of Wall Street’s bulls and bears have now turned into chickens.

Photo: Stuart Dee | Getty Images

There is a lot of fear in the market, but not all of the chickens are birds of a feather. There are the sellers who have become scared off by the market’s volatility, and then there are the longs who fear a rally and don’t want to miss out or get caught short.

“If something happened, and there was a rip-roaring short-covering rally, then everyone would be there with egg on their face,” said Art Cashin, director of floor operations at UBS.

As for the near-term, the market could get a lift. “It’s a little oversold now. Everybody’s talking about a possible turnaround Tuesday,” Cashin said.

There is just the ISM non-manufacturing survey when it comes to U.S. economic data Tuesday. Attention will stay on Europe, as G-7 finance officials hold a conference call to discuss the sovereign crisis. There is also a Reserve Bank of Australia rate meeting overnight, and there is speculation rates could be cut once more.

Monday’s market was far calmerthan Friday, when the S&P 500 fell through its 200-day moving average. But it traded like a yoyo, bouncing higher at the open, then down and then up again, and mixed at the close. The Dow finished the day 17 lower at 12,101, but the S&P 500 finished about a tenth of a point higher at 1,278.

The euro rebounded, rising above 1.25 on speculation Europeans leaders will find a fix for the debt crisis. After the market close, the U.S. Treasury department said European leaders are moving with more urgency but still need to step up action, especially to strengthen the banking sector. Treasury said it hopes to see accelerated action over the next couple of weeks, leading up to the G-20 meeting in Mexico.

With the unsettled state of Europe and global growth worries, many analysts and strategists expect the volatility to continue for weeks, if not months. There are a number who set targets for the decline, well below current levels.

“Selling’s been pretty intense. We are concerned it’s going to be more than a 10 percent (decline). Now, I’m thinking it’s going to be in the 15 to 20 percent range. And that would put us at about 1200,” on the S&P 500, said Andrew Burkly, market strategist at Brown Brothers Harriman.

“After that, we do look for things to rebound and move back higher as we get towards the end of the year,” he said.

Citigroup’s chief equity strategist Tobias Levkovich says it’s still time to sit on the sidelines. In a note, he said the readings on Citi’s panic/euphoria model and valuations argue “powerfully for market gains over the next six and 12 months.” But other measures, including Citi’s economic data surprise index and S&P earnings revision momentum, do not yet signal a turning point for stocks to move higher.

He said it appears the worst of the market correction has occurred but it is too early to buy the market across-the-board. “We are maintaining the 1,425 year-end 2012 target for the index, but we think there will be better signs intimating the next rally effort than we currently see over the next few months,” he wrote.

MacNeil Curry, technical strategist at Bank of America Merrill Lynch, says stocks could go higher but not for long. “We’re going to see a near term bounce around current levels, and maybe one that will last weeks, but it’s a counter trend rally,” he said.

Curry said according to Elliot Wave Theory, five waves have formed since April 2, when the S&P 500 was at 1360. “The support levels are between 1,270 and 1,250...All that tells me we should have a base around current levels,” he said.

Curry said he doesn’t buy the argument that the S&P’s break of the 200-day moving average is what’s important, other than psychologically. “It’s important because it helps shift a lot people’s mindsets more bearishly,” he said.

He is also watching the Shanghai index, which he expects to continue to decline. He said it could lose another 10 percent. “The good thing is when you have a breadkdown from a triangle, it tends to be the last leg of the move,” he said.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.