NEW YORK, March 4 (Reuters) - The bulls drove a relief rally in U.S. stocks on Wednesday after a precipitous five-day slide, but don’t bet the run-up signals a bottom just yet.
As with nearly every bounce seen since the stock market fell from its October 2007 peak and entered a brutal bear market, there is skepticism the latest gains will have staying power.
“This is a dead-cat bounce,” said Todd Leone, head of listed trading at Cowen & Co in New York, using Wall Street parlance for a fleeting recovery after a long sell-off.
“We were so oversold the market just had to rally. I’d like to see us rally through the end of the week, maybe get through that 7,000 level on the Dow and maybe get through the 725 level on the S&P 500,” he said. “We still have a long way to go.”
Long-standing worries about the fallout from the financial crisis are a constant menace to market psychology and Friday could bring investors another reality check when the government releases the February non-farm payrolls data, expected to show further deterioration in the labor market.
U.S. private sector employment, as measured by ADP Employer Services, released on Wednesday suggested a stunning 700,000 drop in February payrolls.
Adding to bearish factors still hanging over the market is the disarray surrounding banks and whether they need more cash to survive.
“One thing that strikes me a little bit is that financials aren’t participating in the rally here. I would have liked to see a 500-point move on the Dow. Maybe we will see another 250 points on Thursday,” added Leone.
Despite a more than 2 percent rise in all three major indexes on Wednesday, the KBW bank index .BKX fell 3.28 percent and the S&P financial index shed 0.75 percent.
At best, the market’s bounce, driven by news of another stimulus plan in China and an 8 percent surge in oil prices, signified a willingness on the part of investors to scour the market for beaten down shares.
“I think everyone sort of expected the market to rally,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. “The market is extremely oversold but with this dire news hanging over everyone’s head it’s tough to get anything going.”
Robert Prechter, the chief executive of Elliott Wave International who had forecast the 1987 market crash, on Friday told Reuters that any recovery in U.S. stocks would be only a bear market rally, with stocks remaining in a bear market for years. He forecast the S&P 500 could fall by half from the 745 level.
According to Reuters data, the benchmark S&P 500 .SPX went into Wednesday's session at its most oversold condition in four months, when measured by its 50-day relative strength index.
The S&P 500 closed below the 700 level on Tuesday for the first time since October 1996, a drop that some had recently thought unlikely.
Linda Duessel, market strategist at Federated Investors in Pittsburgh, said Tuesday’s drop signaled that further declines are likely: “750 was the good low on the S&P 500, but the market voted against the measures coming out of Washington,” and the market ended below 700.
“Technically it feels like you might want to stand aside for the moment and see what happens down at the 660 level,” she said. “The further we go down in this market, as painful as that is, the better the bottom-up opportunities.”
At Wednesday's close, the S&P 500 was down 21.1 percent since the start of 2009, while the Dow Jones industrial average .DJI has shed 21.7 percent and has fallen below 7,000. (Additional reporting by Chuck Mikolajczak; Editing by Leslie Adler)
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