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NEW YORK -- Pinpointing the precise end of scary stock market downturns is, at best, an inexact science. So it's no surprise Wall Street is unwilling to concede that the struggling Dow's surge back above 11,000 after its biggest two-day gain in three years is definitive proof the corrective phase is over.
While professional investors welcomed the Dow Jones industrial average's 309-point gain to 11,015 on Wednesday and Thursday, they said it did not repair all the damage caused by the 8% swoon it suffered over the past five weeks and advised investors to tread cautiously.
"One or two days of a rally does not mean that much," cautions Price Headley, chief analyst at BigTrends.com. Headley, citing historical patterns, notes that the beaten-down market was due for "a bounce." But for the bounce to stick, stocks will likely have to drop again and prove that they can stay above the lowest levels hit in the current downdraft.
The two-day surge -- which gained steam Thursday after Federal Reserve Chairman Ben Bernanke didn't say anything to alarm investors -- provided welcome relief from a free fall that began in early May. That sell-off was sparked by fears that the era of cheap money fostered by historically low interest rates was nearing an end as central banks in the USA, Europe and Asia moved to raise interest rates to contain inflation.
The biggest losses have been suffered by riskier asset classes, such as emerging-markets stocks, commodities and shares of small companies.
Back-to-back up days, however, while a sure "sign of life" for stocks, "is not convincing evidence of a new uptrend," says Ken Tower, chief market strategist at CyberTrader. He says it's unclear whether the rally was fueled by bargain hunters, or a wave of buying by short sellers who had been betting against the market.
Short sellers hope to make money on falling shares by selling borrowed shares and buying them back later at a lower price. When stocks rebounded, these investors opted to buy stocks back before they went even higher, to avoid risking bigger losses.
Tower says it will likely take about a month for the market to work through the bottoming process. Signs that stocks are done falling would be either a massive decline on huge trading volume followed by a sharp rebound, or a successful test of the recent lows and a slow, steady march upward.
Wall Street is debating whether the downturn is over or whether this is a rally in a bear market. Ironically, the Dow's top five daily point gains all came in bear markets. Still, Sam Stovall, chief investment strategist at Standard & Poor's, says this is no bear market. "This is a correction," he says. "Corrections are like a slap in the face, like what we've seen in the past month. Bears can be equated with grinding downward movements that you equate with water torture."
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