Bounce Beckons but Long-Term Challenges Remain

With or without further stimulus, the U.S. economy requires a simple prescription for healing: time. That's what it takes to repair and to work off the excesses of the bubble. One cannot will demand into existence, nor can one create it out of thin air via stimulus or supply-side tax cuts. End demand is a function of the business cycle, and government intervention -- no matter how well intentioned -- is unlikely to substitute for the salve of time.

How much time? After Japan's bubble popped in the late 1980s and a subsequent drop of the Nikkei Dow by some 80%, the Japanese economy was hung over for a decade and a half. The Japanese central bankers, however, made the mistake of cutting rates rather gradually. They allowed a deflationary mentality -- postponing purchases as prices slid -- to take hold amongst their consumers.

Thankfully, that hasn't happened in the U.S. Our central bankers produced far more monetary stimulus, and in a faster time frame, than did their peers across the Pacific. We also appear to have dodged the deflation bullet (at least so far). But that doesn't suggest that we are out from under the post-bubble environment.

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A Checklist for the Rally

As such, we continue to look at the markets as presenting trading, but not necessarily investing, opportunities.

That leads me to look at a shorter time frame than usual.

Modest support exists at S&P 1100 to 1105; if we get extreme sentiment readings at that level, we would be buyers, albeit with tight stop-loss points. However, I expect that the more likely scenario is that the bounce off of those levels will fade until we see a more compelling bottoming process. Why? Several of my indicators are saying that this is merely a mildly oversold condition, but one lacking in significant support or sentiment extremes.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].