We saw a decline of 50%-55% in the recent bear market decline. The rebound we just witnessed was about 20%-25% off the bottom, which represents a pretty tepid recovery.
Disappointing first quarter earnings – which many expect – could help the current rally peter out, leading the market to test new lows. On the bright side, equities will likely remain above those lows, buoyed by confidence in the government’s stimulus packages and expectations of an economic recovery later in 2009 or early 2010.
A basing period helps the market build up resistance. Even if we get worse news on the economic or earnings fronts, stocks may have the resilience to keep above recent lows because a firm bottom has already been established.
Thus, setting a base can be a welcome development. It can mean stability, even if fundamentals are not that encouraging, reflecting the fact that the market is taking things in stride with the anticipation of positive economic/market news several months down the road.