Why Goldman thinks the S&P 500 is headed for an 11% rebound

Welcome to Turnaround Tuesday. A different sort of thrill-ride seems to be ahead for this market, after yesterday’s brief 1,000-point drop for the Dow industrials and a move into correction territory for the S&P 500 and Nasdaq Composite.

There’s currently enough green out to help erase Monday’s nightmare and knock stocks out of this five-session losing streak. And just when everyone thought Beijing didn’t care, China’s central bank cut benchmark lending and deposit rates by 0.25 percentage point. Perhaps they were bothered by another 7.6% drop for the Shanghai Composite.

Wariness doesn’t look like leaving this market any time soon, though.

Among those who can’t shake the unease is blogger The Fly. “This feels different,” he writes. While previous market dramas were triggered by fixable, short-term things like Greece, and even Ebola, he fears China is a permanent problem that won’t go away. “If the China story is truly dead, I’m afraid today’s ‘drop’ will look like child’s play one year from today,” he says. More on that here.

Our chart of the day is lining up with that gloom, with its history lesson showing how a 20% selloff may be just around the corner.

On the more optimistic side is Brenda Kelly, analyst at London Capital Group. She says unlike in 2008, yesterday saw gold and even bond markets trading stay fairly static “and we did not exactly see a great rotation from risk assets into safe havens.”

If you’re looking for more of that feel-good stuff, then the great vampire squid, otherwise known as Goldman Sachs, is here to serve. The investment bank sees a sizable bounce coming for the S&P 500 SPX, -3.94% and doesn’t think China, commodity prices and emerging markets are going to doom this market. Read more in our call of the day.

Key market gauges

A hefty rebound is in store for Wall Street if this action keeps up. Stock futures are pointing to gains of nearly 4% across all major indexes. Dow YMU5, +3.77%  futures are up 596 points. That’s as Asia ADOW, +0.25% kept up the volatility, with sharp losses for the Shanghai Composite SHCOMP, -7.63%  and the Nikkei NIK, -3.96% But crude CLV5, +3.90% regaining $39 a barrel is likely doing something for confidence here. Europe SXXP, +4.44%  is also rebounding after its worst day since 2008.

The dollar USDJPY, +1.01% is up, especially against the yen. Gold GCV5, -0.51%  is dropping.

The economy

A bunch of data might just be some welcome distraction from the chaos. At 9 a.m. Eastern, we get Case-Shiller and Federal Housing Finance Agency home prices. Then at 10 a.m. Eastern, it’s new home sales and consumer confidence.

Remember that later this week we get the Jackson Hole, Wyoming Fed extravaganza, with Federal Reserve vice chairman Stanley Fischer on tap to talk about “U.S. inflation developments.” And that may offer a big clue about rate hikes.

The quote

“With my G-7 and many G-20 counterparts there were frank, honest conversations, you were on the phone pretty frequently, often weekly. With China, you don’t know who to call. It’s hard to know where decision making occurs or who’s calling the shots.” — former Treasury official talks about how tough it is to deal with China.

Source: Market Watch