With the stock market extremely oversold on a short-term basis, a bounce now has the opportunity to unfold that could take the major indexes as much as 8% to 10% higher over the next month. But it's very unlikely that any such bounce will morph into the start of a new bull market.

To explain why, let me turn to the analysis of my friend and colleague Paul Desmond, over at the great research firm Lowry's Reports in Florida. His work on buying and selling pressure is the best around, and is highly prized by the institutional investment community.

Paul notes that major trends in the stock market are largely reflections of the collective emotions of hope, fear or greed expressed by millions of active investors.

At major bottoms, most investors become convinced that the decline will never end and their only hope is to dump everything. But Paul notes that's not the atmosphere today.

Instead, investors are just passing through the "hope springs eternal" stage, as every little rally in the past two months has been depicted in the media as the start of a major new up cycle.

Paul's work suggests that the lack of follow-through on any of those up days or weeks reflects the plain fact that prices are not yet low enough to attract broad, sustained buying enthusiasm. As a result, the probabilities continue to point toward lower prices.

Some Key Points

• This bear market has already lasted longer, but has been far less intense, than most bear markets. The DJIA and the NASDAQ Composite just passed the -20% level last week and are still far above the -30% decline level for the average bear market in the past 80 years.



• The S&P Midcap 400, which represents the majority of NYSE-listed stocks, has lost just 14.1%.



• Also, Lowrys' most reliable long-term "oversold" indicator, based on the price strength of the average stock, has dropped below its March '08 low, but is still far above levels typically found in advance of major market bottoms.



• Each of the tradable rallies since July '07 have been preceded by three or four 90% Downside Days—those sessions in which 90% of stocks are down and 90% of volume is down. Yet the current decline has produced two 90% Down Days, on June 6th and June 26th. If those two 90% Down Days had fulfilled their function of exhausting the desire to sell, and had driven prices down to dramatic bargain levels, then we should have seen buyers quickly rushing back into the market to enthusiastically buy across a wide spectrum of stocks, generating a 90% Upside Day. Thus far, that has not happened.



• Based on past experience, it should not take much more than a few days for investors to recognize the bargains after a final spike down in prices. As a general rule, the more time that passes from the last 90% Down Day to its opposite, which is a 90% Up Day, the weaker the probabilities become for a substantial, sustainable rally.

Paul's work centers on the forces of buying pressure and selling pressure, which roughly correlate to the level of enthusiasm of each of these two key groups.

Although there are always buyers matched with every seller…