Waiting For A Market Bounce

Despite my hope that we would get a bounce today, the Dow Jones Industrial Average ($DJI) plunged below its Nov 21 low of 7,449. The blue-chip average hit 7,249.54 before attempting a rebound this afternoon.

Options expiration is probably not helping matters, but there are other factors.

The biggest problem is the economy. We're in a recession. Jobs continue to get slashed. The latest housing bailout plan may not even work. Deflation remains a threat.

Banks are in trouble. Throughout the day, there has been increased scuttlebutt about nationalizing Citigroup (C - Analyst Report), Bank of America (BAC - Analyst Report) and others. Senator Christopher Dodd commented that banks could be nationalized for "a short time". Behind the headlines is the fact that an increasing number of smaller banks are failing, while credit card defaults are rising.

Valuations are questionable at best. The S&P 500 (SPX) might seem cheap at 12x projected 2009 earnings, until one considers that the consensus earnings estimate of $63.39 per share is worthless. Bluntly put, I have more faith in my ability to pick this year's Final Four teams than in full-year profit forecasts.

Earnings are terrible. Among S&P 500 members that have released fourth-quarter results, nearly 60% have reported a year-over-year drop in earnings.

Next week won't provide much of a respite from the bad news. Fed Chairman Ben Bernanke will testify before Congress. Housing data and preliminary Q4 GDP will be published. And earnings season will continue with Home Depot (HD - Analyst Report), Target (TGT - Analyst Report) and Dell (DELL - Analyst Report reporting.

There are two points of light. The first is that the markets are oversold. Stochastics have been pretty good at calling rebounds and, right now, they are saying it's time for a bounce.

The second is a CNBC report predictng details about the latest bank bailout plan could be released next week. If this holds true, and the markets react favorably (a big if), stocks could rise.

Any rise in stocks won't signal the end of the bear market, but any upward move would be welcomed.

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Read the full analyst report on DELL

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Read the full analyst report on $DJI