An oversold market gets an overdue bounce. Now what?

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The stock market can’t do anything in moderation anymore.

Last week’s record 18.2% drop in the Dow Jones industrial average was followed by today’s 11.1% rebound, the fifth-largest percentage gain ever.

Is your head spinning?

And on a day like this after a week like that, the first thing you’ll hear from Wall Street analysts is that the market was overdue for a big bounce -- so be careful, they warn, about reading too much into it, or betting it has legs.

After last week, ‘This was the largest oversold situation we’ve seen in a generation,’ said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati.

‘Oversold’ means the selling had gone on for so long that, for the moment, there were few investors left to jettison stocks.

The Dow had dropped 26% from Sept. 19 through Friday, in a slow-motion crash that speeded up last week as hedge funds and mutual funds dumped shares to meet real or expected investor redemptions.

Once a rally gets going from oversold conditions, the buyers temporarily are in total control, notes Tony Dwyer, market strategist at FTN Midwest Securities in New York. They would include, he says, ‘short sellers’ who are buying back stock to cover bearish bets, day traders and other momentum players, and the ‘Oh-my-God-I-missed-it’ investors who thought about buying last week but waited.

Still, the market needed a catalyst, and it got one: news of literally trillions of dollars in new government aid for banks in Europe to get them over the credit crisis.

And in Washington, the Bush administration pushed ahead with plans to directly inject capital into U.S. banks, a strategy that may be a faster route to restoring faith in the financial system than buying up bad loans.

‘Governments needed this rally to happen,’ to bless the new, expanded bank rescue plans, said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

So maybe for the first time in this crisis, investors and government bailout engineers were seeing eye-to-eye today.

But even if there’s a thaw in the credit situation, the stock market will have to face up to the damage already baked into the outlook for the economy and corporate earnings, Pado notes.

In third-quarter profit reports that will begin to roll out in earnest this week, he figures many companies will sound extremely cautious in their forecasts for the fourth quarter.

‘I think they’re going to put the worst-case scenarios out there,’ Pado said.

And without a clear sense of how bad off the economy will be in the fourth quarter and in 2009, investors who haven’t sold stock thus far may be itching to let some go with this rebound -- putting a lid on the market’s recovery potential.

Welcome as the vast new bank bailout plan may be, Dwyer says, investors ought to realize that ‘saving the global financial system from Armageddon is not a growth strategy.’