The three-day run-up in U.S. stocks on Thursday is bringing desperately needed relief for bruised investors, but the bounce off 12-year lows is stoking fears that it may be a little too rapid to be sustainable.
A crucial characteristic of a meaningful rally is the market's ability to consolidate its gains over time to build a solid base, market technicians and strategists said.
In just three days, the Standard & Poor's 500 <.SPX> is up 11 percent. But for the year so far, the S&P is still down 16.9 percent. Since its October 2007 record high, the index is still off 52 percent.
It's way too early to say if this is the bottom, said John Kosar, market technician and president of Asbury Research in Chicago. Over the course of several weeks, you want to see the market build a base. It's more important that the market holds here and maybe even churns here instead of it being something like a rocket shooting up.
Chartists regard lengthy consolidation periods as laying the foundation for an eventual bottom.
Right now we really need to get some consolidation, said Cleveland Rueckert, market analyst at research firm Birinyi Associates Inc in Stamford, Connecticut.
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Short-covering refers to the unwinding of bets that stocks would keep going down.
BEWARE OF VIX CLINGING TO 40
At Thursday's close, the S&P scored its best three-day run since the end of November and the Dow Jones industrial average <.DJI> ended back above 7,000 for the first time since Feb 27.
Having broken through resistance around the 715 level on Wednesday, the benchmark S&P 500 finished just above 750 on Thursday, a critical level that gave way late last month as the index made its way down to 12-year lows and a fresh intraday bear market low.
Another source of discomfort about the latest bounce is the fact that the CBOE Volatility Index <.VIX> , also known as Wall Street's fear gauge, remains elevated at around 40 and in a range at which the market's previous recovery attempts have faltered since November.
Additionally, analysts noted that high-yield spreads are still too wide, short-term credit spreads are creeping back up, and upside equity volume has yet to pick up speed despite improving slightly on Tuesday and on Thursday.
Even so, other analysts said the three-day advance could be another attempt at a turnaround, albeit over a lengthy period.
It's a rally across a range within the context of the base-building pattern we've been in for the last six months, said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
(Editing by Jan Paschal )