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Kass: History Favors a Bounce

This column originally appeared on Real Money Pro at 7:35 a.m. EDT on Sept. 27.

NEW YORK ( Real Money) -- Since the Bernanke sugar high, the U.S. stock market is down by about 3%, and the yield on the 10-year note has settled in at 1.61% (compared to a short-term high in yield of 1.91%).

As I have written in the five myths of quantitative easing, I expect QE3's influence to be waning on the U.S. stock market and on the domestic real economy.

But with equity prices and bond yields lower in seven of the last eight trading days and with quarter-end approaching at the close of trading on Friday, I would expect a dead-cat bounce in stocks and bond yields. (Only the most facile traders should apply to play a potential recovery in stocks over the next 48 hours.)

Stated simply, stocks are oversold, and bonds are overbought.

According SentimenTrader, in the four other times in the past 20 years when stocks were down in seven out of eight trading days after having reached a 52-week high during the prior two weeks (Aug. 13, 1992; Dec. 6, 1996; Feb. 24, 2004; and March 2, 2007), the index rebounded over the next three days each time. (Results were mixed after the initial bounce.)

Another technical positive is that the S&P 500 bottomed out yesterday very close to the level from which it recently broke out. In other words, that previous resistance area could (at least temporarily) serve as some support.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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Chart of I:DJI
DOW 16,472.37 +200.36 1.23%
S&P 500 1,951.36 +27.54 1.43%
NASDAQ 4,707.7750 +80.6910 1.74%

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