This overlay, based on market breadth (the number of advancing issues versus declining issues), appeared to be a promising way of catching more
of these bear market rallies.
Is such behavior indicative of a stock market revival or simply evidence
of a bear market rally?
Moreover, stocks are currently overbought to the same extent that they were near the end
of the bear market rallies we observed during the 2000 - 2002 decline.
Not exact matches
That was one
of the all - time classic
bear markets, characterized by high inflation, high unemployment, high Treasury yields and rising inflation — as well as strong
rallies followed by sharp selloffs.
What a lot
of people are saying is it's just a
bear market rally.
It is important to underscore that the most brutal damage
of a
bear market always comes on the heels
of strong intermittent
rallies.
A Crash Warning certainly does not rule out the powerful intermittent
rallies that are part and parcel
of an ongoing
bear market.
The slight evidence
of an oversold
market is certainly nothing to speculate on, since
bear markets can remain deeply and repeatedly oversold without consequence, but it does allow the possibility
of a sharp intermittent
rally to clear the
market for a fresh decline.
One
of the most useful new findings over the past year is that strong breadth reversals, combined with falling interest rates, are typically a very early and effective signal
of rallies that occur within
bear markets.
In the wake
of the (now overbought) relief
rally following the
Bear Stearns debacle, we are hearing the increasingly prevalent notion that the financial
markets have «put in a bottom» and that the mortgage crisis is largely behind us.
For now, we remain defensive, but we recognize the potential for a «
bear market rally» despite conditions that, as yet, do not provide enough evidence to warrant removing a significant portion
of our hedges.
* SPY is below its 200 - day moving average, so it is fair to characterize this advance as a «
rally in a
bear market» (no prediction here, just noting that
bear market rallies have a way
of reversing quickly and painfully);
But in decades
of research, I've still not found a reliable means to capture brief «
bear market rallies» that don't include falling yields as a requirement.
When selling short in a
bear market, I scan for former leadership stocks that had a strong
rally over the course
of several years, but have begun to fall apart and take a beating.
As we write it is 79, up from 77.60 in a normal
bear market rally assisted by a temporary manipulation by the US government that will be
of no lasting consequences.
After topping above $ 700 in 1981, gold lost more than half
of its value in just over a year, followed by two sharp
bear market rallies, and then died a slow death over the next 12 years.
Last March net wealth declined from a peak
of $ 22 trillion to $ 12 trillion and due to a
bear market rally it has moved back to about $ 15 trillion.
The gold
rally that began in December
of 2015 will differentiate itself from the 1982 - 1983
bear -
market rebound if the gold price closes above its July - 2016 peak AND the HUI closes above its August - 2016 peak.
In fact, Mr. Ritholtz is one
of several commentators who believe this
rally has merely been a temporary cyclical swing in the midst
of a longer - term
bear market — one that began roughly a decade ago and is far from over.
Alas, his stern warning came in March
of 1929, when the
market had just endured a temporary break, and the subsequent
rally relegated him to the stable
of «obsolete
bears».
If it can continue to
rally in the face
of heavy pressure from hedgers, it will be an excellent sign that the
bear market is likely over.
The
bear market rally that started in March
of 2009 is near the end
of its rope.
However, despite the healthy
rally during the past 18 months, it's still much too early to conclude that January 2016 was indeed the final bottom
of this brutal
bear market.
Furthermore, I believe
market timing can be the greatest detractor to our long - term returns whether we become overly pessimistic and sell into
bear markets, catch the irrational exuberance bug and buy into the end
of bull
market rallies, or sell out too early in bull
markets and miss some
of the best years in the
market.
The 1982 secular bull
market was preceded and followed by secular
bear markets that featured lots
of sharp
rallies and sell offs, but netted investors nothing after more than a decade.
The red dates represent this decade's
bear -
market rallies, including 4 during the 2000 - 2003
bear market and the
rally that lasted from November
of last year through January.
The chart below again shows all
of the
bear -
market bottoms since 1940 in blue and the 5 most recent
bear -
market rallies in red, along with this year's advance.
Since it's unknown whether the recent advance is a
rally within a
bear market or the beginning
of a new bull
market, the
market's performance in 2009 is denoted in orange.
The impact
of a
bear market on an investor's emotions and psyche is quite different when you're going through it in real time, when stock prices are tumbling day after day, when
rallies fizzle and lead to even bigger losses, when there's no end in sight and you see your hard - earned savings dwindling before your eyes.
Bear market rallies will easily produce moves
of 20 % or more in a matter
of weeks.
It is much easier to define a
bear market rallies in terms
of the larger indices versus individual stocks.
A «
Bear Market Rally» is a sharp move up in the context of a larger bear mar
Bear Market Rally» is a sharp move up in the context of a larger bear m
Market Rally» is a sharp move up in the context
of a larger
bear mar
bear marketmarket.
There are a number
of methods for identifying a
bear market rally and below are some clear red flags:
The principle characteristic
of a
bear market is very sharp down movements followed by quick retracements... In a
bear market, you have to use sharp counter-trend
rallies to enter positions.
Rather than simply buying and holding, many active managers try to predict when securities are over - or undervalued, moving in and out
of positions to avoid
bear markets and profit from any subsequent bull
rally.
Elliott Wave Theorist's Bob Prechter is comparing the 1973 stock
market to the 2011 stock
market — calling the situation very like that
of 1973 — the stock
market has been in a two - year
bear market rally, per our interpretation
of the Elliott Wave model.
What's more, the Fed organized the bailout
of Bear Stearns in March of that year, sparking a relief rally that kept the S&P 500 well above the bear market demarcation line for three more mon
Bear Stearns in March
of that year, sparking a relief
rally that kept the S&P 500 well above the
bear market demarcation line for three more mon
bear market demarcation line for three more months.
But most
of the
rally has already happened, and
bear markets often have multiple bottoms.
Another interesting aspect
of the European Value Index is that at times it can
rally faster and harder after a large decline in the US stock
market (see the period following the 1987 crash and the 2000 - 2003
bear market).
Earnings Growth Forecasts May Require a Robust Economic Recovery Secular
Bear Markets and the Volatility
of Inflation Trading Volume Separates Bull
Markets from
Bear Rallies A Stock
Market Rebound Closely Linked with Economic Data Surprises
Market Valuations During U.S. Recessions Stock
Market Valuations Following the Great Moderation Will Global
Markets Take Their Lead from the U.S.?
Thinking
of it this way aids daily trading, and allows for clever trading in
bear market rallies, and bull
market pullbacks, while still watching the overall macroeconomic credit cycle.
Do not be deceived into believing that such
bear market rallies are the outset
of a new bull phase.
The possibility
of a «
bear market rally» aside, if the S&P 500 has already set its low, it will have been the first time that the
market has responded to a similar economic downturn with less than a 20 % loss on a closing basis.
Selling into a
bear market rally can help one raise the cash desired to weather the series
of tornadoes yet to come; it also gives one the confidence to increase stock exposure at more attractive prices.
Nevertheless, until the Federal Reserve reverses course by opting for zero percent rates with a 4th round
of quantitative easing,
bear market rallies will continue to deceive those who hide their heads in the sand.
Buying the dips
of the previous
bear market rallies proved damaging.
Bull
markets are
rallies of 20 % that were preceded by a decline
of 20 % and vice versa for
bear markets.
Even with these sporadic
rallies end, we have yet to see the long drawn out fundamental portion
of the
Bear Market.
What started out as a
boring week
of market activity quickly turned into a significant bull
rally.
Created in 2009, Bitcoin has been the pioneer
of the new -
born crypto
market and early holders have benefited from an impressive
rally in Bitcoin's price.