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Bear Market Rallies: Here’s a Key Insight

How investors get snookered into the belief of “a further market advance”

by Bob Stokes
Updated: September 20, 2022

Nothing raises the hopes of the bullishly inclined like a rapid bear market rally. And there's been several since the early January top in the Dow Industrials and S&P 500 index.

You may be interested in a key characteristic of most of these rallies.

Our Sept. 12 U.S. Short Term Update explains with this chart and commentary:

BearMarketRallies

Sometimes the upward push will end at or near top tick of the daily range. A quick glance at the countertrend rallies since the January peak in the S&P shows at least five instances of this happening, indicated by the red arrows on the chart. The final trade of these daily ranges was at or very near the high of the day, creating belief in a further market advance when in fact it was the top of the rally.

Keep in mind that "not every strong up day that closes at top tick marks the end of the rally but the end of the rally is often attended by strong up days that close at top tick."

That said, here are just a couple of examples in recent months of the lingering optimism:

  • Why There's a Chance the Stock Market Has Hit Bottom (Barron's, July 19)
  • Top Investment Ideas for a Market That Might Have Hit Bottom (Bloomberg, Aug. 4)

In other words, memories of the prior bull market die hard, even several months after the S&P 500's record high near the start of the year.

And, regarding those July and August headlines about a market bottom, that didn't turn out to be the case. Here's a Sept. 16 headline (CNBC):

FedEx plunge could spell bad days ahead for market as bellwether Dow Transports index hits new low

The question is: Will other indexes -- like the S&P 500 and Dow Industrials -- also plunge to new lows?

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