Opinion: Don't be fooled by a bear-market rally in stocks
Big gains aren't unusual, even if the overall trend is down
CHAPEL HILL, N.C. (MarketWatch) — If you want to know what a bear-market rally in stocks looks like, the past month has been a sterling example.
That's because rallies as sharp as we've seen since the Feb. 11 lows are hardly unusual, even when the major trend is down.
That doesn't guarantee that we're in a bear market, of course. But it does mean you can't conclude that we're not in a bear market just because the benchmark S&P 500 Index is 10% higher than where it was a month ago.
Consider the frequency and magnitude of rallies during all primary bear markets since 1900. The data in the chart at the top of this column, courtesy of James Stack of InvesTech Research, show that the average major bear market features six rallies of at least 5%. In two of those, the increase is more than 10%.
Take, for example, the 2007-2009 bear market. On 12 occasions over that 16-month period, the stock market staged at least a 5% rally, according to Stack's calculations. In four cases, the gains topped 10%.
The accompanying chart also includes data for 2015, on the assumption that a bear market did indeed begin last May. You can readily see that the number of significant rallies is below average.
Even on the assumption that we're in a bear market, in other words, one could argue that the rally that has taken place over the past month was overdue.
The broader investment lesson here is straight out of the contrarian analyst's playbook: The market will do whatever it takes to fool the majority of investors. At the Feb. 11 bottom, for example, a consensus had begun to emerge that we were indeed in a bear market. Like clockwork, the market staged a powerful rally.
Today, in contrast, it's worrying that so many of the month-earlier bears are now bullish. Contrarians would be more inclined to give the market the benefit of the doubt if there weren't so many arguing that the strong rally was evidence that the bull market is alive and well.
Contrarians often use a rodeo analogy: The bear market is a bucking bronco, doing its darndest to throw us off its back on its way across the rodeo ring. There is a distinct possibility that it's doing just that.
Posted by: sarah_oz@yahoo.com
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