Typically when the market is as oversold as it was last week and sentiment is extreme, the market has a one to three day bounce at minimum. More often a bounce lasts closer to two weeks. So which is the case now?
I have a hard time believing that the market will head much lower right now. The market rarely goes down when everybody wants it to go down. Last week we saw individual investors as gloomy as they were at the March 2009 lows, according to the AAII survey. Hedge funds de-risked at the beginning of the Summer and there is little reason to believe that has changed. Both hedge funds and individuals would look like heroes if the market crashed right now.
I believe the most likely outcome is that we stay in a trading range, with the possibility of expanding the upside of the range if there is enough cash M&A. That said, I took the precaution of partially rehedging my portfolio at the end of the day Friday, after catching the easy trade (some sort of rally off the deeply oversold condition and extreme sentiment). We are still in a secular bear market and the economy is deteriorating so I will not press my luck too hard on the long side even if I believe it is the right trade in the short term.