Will the Summer Relief Rally Last?

It's the first three-day rally for stocks since July 1st. And it's the best three-day percentage gain since the S&P 500 popped 11% in a small stretch that brought the market off the March 2009 lows.

While it may feel nice to have a summer relief rally, you'd better love it while it lasts because traders like Peter Kenny of Knight Capital say this will be gone before you know it. "This is only a tradable bounce for those who have got a very strong stomach," Kenny says from his firm's trading floor across the Hudson River in Jersey City, NJ. What's worse is that he thinks we're at the top of the range (for this year at least), and that we could see another 15-20% downside from here.

In the short-term, Kenny says we've had a change of focus with the "reintroduction of the M&A theme" today, courtesy of Google's (GOOG) $12.5 billion deal for Motorola Mobility (MMI) which some say is designed to mimic Apple (AAPL). While the longevity of these bounces will be largely dependent on economic data this week, "you still have to trade these bottoms," says Kenny.

The M&A pop "has given the market the opportunity to shift that myopic focus away from the Eurozone, which may not last that long, and away from the US debt ceiling and government spending," Kenny says before returning to his overall bearish thesis. "This is the life support for a market that's in a downward trend."

Interestingly, recent analysis from Factset (FDS) shows that negative guidance from S&P 500 companies for the 3rd quarter has outpaced positive guidance by more than a 2-to-1 margin this earnings season. Kenny believes this could "counter-intuitively, set us up for some buoyancy in the market."

Even so, he says "there is a degree of fear in the market that not even good earnings can dispel." He's concerned that the overhang of geopolitical worries will have a much more corrosive effect on investors and consumers, and the markets will reflect that.