Short-term oversold seeks a bounce

Equity markets sure have a penchant for correcting quickly.

Unfortunately for bulls, this sharp correction and oversold market is overshadowed by a confirmed downtrend. So while a bounce is anticipated, selling into rallies will be the preferred strategy.

Some positive signs include positive seasonal timing, recent outperformance of financials (certainly as compared to technology), and oversold technicals. Better-than expected GDP growth (5.7%) and brisk replenishment of inventories have historically allowed market rallies (off recession troughs) to continue at least into a trading range (following gains similar to what we have seen from the March bottom).

Therefore, we believe that the market is more likely to undergo a 10-15% correction from its top as opposed to making a significant (i.e. 2/3) retracement of its recent gains or new lows.

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